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Housing and Monetary Policy

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  • John B. Taylor

Abstract

Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.

Suggested Citation

  • John B. Taylor, 2007. "Housing and Monetary Policy," NBER Working Papers 13682, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13682
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    References listed on IDEAS

    as
    1. Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 718-740, August.
    2. William Poole, 2007. "Understanding the Fed," Review, Federal Reserve Bank of St. Louis, vol. 89(Jan), pages 3-14.
    3. Dino Kos, 2002. "Domestic open market operations during 2002," Annual Report Domestic Open Market Operations, Federal Reserve Bank of New York.
    4. Dino Kos, 2001. "Domestic open market operations during 2001," Annual Report Domestic Open Market Operations, Federal Reserve Bank of New York.
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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