Abstract:
Our paper considers the channel whereby monetary policy, a Federal funds rate shock, affects
the dynamics of the US housing sector. The analysis uses impulse response functions
obtained from a large-scale Bayesian Vector Autoregression (LBVAR) model that
incorporates 143 monthly macroeconomic variables over the period of 1986:01 to 2003:12,
including 21 variables relating to the housing sector at the national and four census regions.
We find at the national level that housing starts, housing permits, and housing sales fall in
response to the tightening of monetary policy. Housing sales reacts more quickly and sharply
than starts and permits and exhibits more duration. Housing prices show the weakest response
to the monetary policy shock. At the regional level, we conclude that the housing sector in the
South drives the national data. The responses in the West differ the most from the other
regions, especially for the impulse responses of housing starts and permits.
