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The role of house prices in the monetary policy transmission mechanism in small open economies

  • Hilde C. Bjørnland

    (Norwegian School of Management and Norges Bank (Central Bank of Norway))

  • Dag Henning Jacobsen


    (Norges Bank (Central Bank of Norway))

We analyse the role of house prices in the monetary policy transmission mechanism in Norway, Sweden and the UK using structural VARs. A solution is proposed to the endogeneity problem of identifying shocks to interest rates and house prices by using a combination of short-run and long-run (neutrality) restrictions. By allowing the interest rate and house prices to react simultaneously to news, we find the role of house prices in the monetary transmission mechanism to increase considerably. In particular, house prices react immediately and strongly to a monetary policy shock. Furthermore, the fall in house prices seem to enhance the negative response in output and consumer price inflation that has traditionally been found in the conventional literature. Moreover, we find that the interest rate respond systematically to a change in house prices.

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Paper provided by Norges Bank in its series Working Paper with number 2009/06.

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Length: 20 pages
Date of creation: 27 Apr 2009
Date of revision:
Handle: RePEc:bno:worpap:2009_06
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