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Can Monetary Policy Lean against Housing Bubbles?

Author

Listed:
  • Christophe André

    () (Organisation for Economic Co-operation and Development (OECD))

  • Petre Caraiani

    () (Institute for Economic Forecasting, Romanian Academy)

  • Adrian Cantemir Čalin

    () (Institute for Economic Forecasting, Romanian Academy)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria, Pretoria, South Africa)

Abstract

This paper investigates whether the counter-intuitive result of Gali and Gambetti (2015), where stock prices react positively to a monetary tightening, also holds for housing prices. Estimating a Bayesian VAR model based on an asset-pricing framework and allowing for rational bubbles for the United States, the United Kingdom and Canada, we find that housing prices respond negatively to a monetary policy shock, as common intuition would suggest. We also show, using a Markov Switching VAR model for the United States, that the response of housing prices to a monetary policy shock is not sensitive to the state of homebuyers sentiment. Hence, monetary policy can prove effective in fighting housing price bubbles. However, “leaning against the wind" has costs in terms of lost output while inflation becomes lower. Hence, before implementing such a policy, its relative efficiency and interactions with other policies, notably macro-prudential, need to be carefully considered.

Suggested Citation

  • Christophe André & Petre Caraiani & Adrian Cantemir Čalin & Rangan Gupta, 2018. "Can Monetary Policy Lean against Housing Bubbles?," Working Papers 201877, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201877
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    References listed on IDEAS

    as
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    Keywords

    housing; bubbles; VAR; monetary policy;

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