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Monetary policy and house prices: a cross-country study

  • Alan G. Ahearne
  • John Ammer
  • Brian M. Doyle
  • Linda S. Kole
  • Robert F. Martin

This paper examines periods of pronounced rises and falls of real house prices since 1970 in eighteen major industrial countries, with particular focus on the lessons for monetary policy. We find that real house prices are pro-cyclical—co-moving with real GDP, consumption, investment, CPI inflation, budget and current account balances, and output gaps. House price booms are typically preceded by a period of easing monetary policy, but then diminishing slack and rising inflation lead monetary authorities to begin tightening policy before house prices peak. In a careful reading of official reports, speeches, and minutes, we find little evidence that foreign central banks have reacted to past episodes of rising real house prices beyond taking into account their implications for inflation and output growth. However, central bankers have expressed a range of opinions in the more recent policy debate with some willing in certain cases to raise policy rates to try to stem current and future surges in asset prices while others favor moral suasion or a hands-off approach. Finally, we characterize the risks associated with house-price reversals. Although mortgage lenders in some countries have significant exposure to house prices, the balance of evidence suggests that this exposure does not, in and of itself, pose a significant risk to financial stability. Nevertheless, the co-movement of both property prices and default rates with the business cycle means that losses on mortgage lending are likely to be higher when banks’ other lines of business are also performing poorly.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 841.

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Date of creation: 2005
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Handle: RePEc:fip:fedgif:841
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  1. Yutaka Yamaguchi, 2002. "Monetary policy in a changing economic environment," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 241-251.
  2. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
  3. Nathalie Girouard & Sveinbjörn Blöndal, 2001. "House Prices and Economic Activity," OECD Economics Department Working Papers 279, OECD Publishing.
  4. Karl E. Case, John M. Quigley, Robert J. Shiller., 2001. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Economics Working Papers E01-308, University of California at Berkeley.
  5. anonymous, 2004. "Asset prices and monetary policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 67, march.
  6. David Gruen & Michael Plumb & Andrew Stone, 2005. "How Should Monetary Policy Respond to Asset-Price Bubbles?," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
  7. Yutaka Yamaguchi, 1999. "Asset price and monetary policy : Japan's experience," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 171-176.
  8. Refet Gurkaynak, 2005. "Econometric Tests of Asset Price Bubbles: Taking Stock," Finance 0504008, EconWPA.
  9. Joshua H. Gallin, 2004. "The long-run relationship between house prices and rents," Finance and Economics Discussion Series 2004-50, Board of Governors of the Federal Reserve System (U.S.).
  10. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
  11. Guy Debelle, 2004. "Macroeconomic implications of rising household debt," BIS Working Papers 153, Bank for International Settlements.
  12. Jack Selody & Carolyn Wilkins, 2004. "Asset Prices and Monetary Policy: A Canadian Perspective on the Issues," Bank of Canada Review, Bank of Canada, vol. 2004(Autumn), pages 3-14.
  13. Rochelle M. Edge, 2000. "The effect of monetary policy on residential and structures investment under differential project planning and completion times," International Finance Discussion Papers 671, Board of Governors of the Federal Reserve System (U.S.).
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