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The effects of the monetary policy on the U.S. housing boom from 2001 to 2006

Jiarui Zhang and Xiaonian Xu

Research in Economics, 2020, vol. 74, issue 4, 301-322

Abstract: This paper presents a DSGE model to test the relative significance of monetary policy and financial market innovations in creating the U.S. housing boom between 2001 and 2006. The model generates a trajectory of house price that mimics the Case–Shiller index well when actual Federal Fund rates are taken as inputs. It fails to do so when the monetary policy follows the Taylor rule even if MBS are introduced. We identify several transmission mechanisms of monetary policy with an emphasis on the financial accelerator. The model predicts that banks’ lending standards will go down with the benchmark interest rate.

Keywords: Monetary policy; Housing price; Financial innovation; Mortgage backed securities (search for similar items in EconPapers)
JEL-codes: E32 E44 G01 R31 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.rie.2020.10.001

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Handle: RePEc:eee:reecon:v:74:y:2020:i:4:p:301-322