Can monetary policy lean against housing bubbles?
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Date
Authors
Andre, Christophe
Caraiani, Petre
Calin, Adrian Cantemir
Gupta, Rangan
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Abstract
Gali and Gambetti (2015) found protracted episodes in which stock prices rise in response to monetary policy tightening. This counter-intuitive result suggests that raising the policy rate in response to a perceived asset price deviation from fundamentals may fail to contain an emerging bubble. Since housing is often at the epicenter of deep and protracted recessions, it is essential (from a monetary policy perspective) to assess whether the result from Gali and Gambetti (2015) also holds when one considers housing instead of stock prices. Thus, we estimated a Bayesian VAR model based on an asset-pricing framework allowing for rational bubbles in the United States, the United Kingdom, and Canada. In addition, this estimation framework separates the fundamental component of housing prices from its bubble component, derived as the deviation of observed prices from the fundamental values. This allowed us to examine the responses of both components to a monetary policy shock and assess how bubbles may affect the responses of housing prices to monetary policy tightening. According to the results, we found that housing prices respond negatively to an interest rate hike, as common intuition would imply. This indicates that monetary policy may play a role in fighting housing price bubbles.
Description
Keywords
Housing, Bubbles, Vector autoregressive (VAR), Monetary policy, Asset pricing, Leaning against the wind
Sustainable Development Goals
Citation
André, C., Caraiani, P., Călin, A.C. et al. 2022, 'Can monetary policy lean against housing bubbles?', Economic Modelling, vol. 110, art. 105801, pp. 1-29, doi : 10.1016/j.econmod.2022.105801.