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Financial Market Liberalization, Monetary Policy, and Housing Price Dynamics

  • Rangan Gupta

    (University of Pretoria)

  • Stephen M. Miller

    (University of Connecticut and University of Nevada, Las Vegas)

  • Dylan van Wyk

    (University of Pretoria)

This paper considers how monetary policy, a Federal funds rate shock, affects the dynamics of the US housing sector and whether the financial market liberalization of the early 1980s influenced those dynamics. The analysis uses impulse response functions obtained from a large-scale Bayesian Vector Autoregression (LBVAR) model over the periods 1968:01 to 1982:12 and 1989:01 to 2003:12, including 21 housing-sector variables at the national and four census regions. Overall, the 100 basis point Federal funds rate shock produces larger effects on the real house prices, both at the regional level and the national level, in the post-liberalization period when compared to the pre-liberalization era. While the precision of the estimates do not imply significant differences, the finding does offer a caution. That is, the housing market appears more sensitive to monetary policy shocks in the post-liberalization period. On the one hand, this suggests that monetary policy possesses increased leverage. On the other hand, the housing market cycle traditionally contributes an important component to the aggregate business cycle. Thus, the monetary authorities may need to exercise more care in implementing Federal funds rate adjustments going forward. In addition, contractionary monetary policy exerts a negative effect on house prices at the national level, indicating the absence of the price puzzle in small structural vector autoregressive models. The puzzles absence in the housing sector possibly emerges as a result of proper identification of monetary policy shocks within a data-rich environment. Finally, we find that the reaction of housing sector proves heterogeneous across regions, with the housing sector in the South driving the national data after liberalization, while before liberalization, the Middle West appears to drive the housing market. The responses in the West differ the most from the other regions.

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File URL: http://web2.uconn.edu/economics/working/2010-06.pdf
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2010-06.

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Length: 28 pages
Date of creation: Mar 2010
Date of revision:
Publication status: Published in International Business & Economics Research Journal, 11(1) 2012
Handle: RePEc:uct:uconnp:2010-06
Note: We would like to thank Marta Banbura for providing us with the codes used in estimating the large-scale BVAR and her assistance with its implementation.
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