Can monetary policy lean against housing bubbles?

Christophe André, Petre Caraiani, Adrian Cantemir Calin and Rangan Gupta

Economic Modelling, 2022, vol. 110, issue C

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.

Keywords: Housing; Bubbles; VAR; Monetary policy; Asset pricing; Leaning against the wind (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 G12 R31 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Can Monetary Policy Lean against Housing Bubbles? (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:110:y:2022:i:c:s0264999322000475

DOI: 10.1016/j.econmod.2022.105801

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