Abstract:
In this paper, we examine the causal linkages between policy uncertainty and housing
prices in a panel of seven advanced countries including Canada, France, Germany, Italy,
Spain, the United Kingdom, and the United States. We implement a bootstrap panel
causality test on quarterly data from 2001:Q1 to 2013:Q1, which allows us to circumvent
the data limitation as observations are pooled across countries. The results provide
evidence of a bi-directional causality between real housing prices and policy uncertainty,
suggesting that high uncertainty related to future economic fundamentals and policies
increases housing price volatility, which in turn may amplify financial and business cycles.
The results also show bi-directional causality for France and Spain, but only unidirectional
causality for the remaining countries. Specifically, unidirectional causality runs from policy
uncertainty to real housing prices in Canada, Germany and Italy and from real housing
prices to policy uncertainty in the U.K. and the U.S.
