Did monetary policy fuel the housing bubble? An application to Ireland

Cindy Moons and Kevin Hellinckx

Journal of Policy Modeling, 2019, vol. 41, issue 2, 294-315

Abstract: This paper provides empirical evidence of the role of the euro in the genesis of the recent Irish financial-economic crisis. By using a Taylor rule we measure the appropriateness of the ECB’s one-size-fits-all policy rate for the Irish economy. A counterfactual analysis suggests that the Irish interest rate should have been on average 6.5% higher. Using a BVAR and multivariate housing model, we provide econometric evidence that under an alternative sovereign monetary policy, the average house price would have been 25–30% lower just before the housing bust. In addition, it shows that a monetary policy tailored to the needs of the member state prevents housing prices from dramatically increasing.

Keywords: EMU; Monetary policy; Taylor-rule; Housing bubble (search for similar items in EconPapers)
JEL-codes: E5 F6 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:41:y:2019:i:2:p:294-315

DOI: 10.1016/j.jpolmod.2019.03.006

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