Exchange Rate Shocks, Monetary Policy and Boom-Bust Cycles in the Housing Market: An Econometric Analysis for Switzerland

Peter Stalder ()

Journal of Business Cycle Research, 2016, vol. 12, issue 2, No 4, 217-251

Abstract: Abstract The worldwide financial turbulences of 2008 and the following European debt crisis have put the Swiss franc under persistent upward pressure, prompting the Swiss National Bank to lower short-term interest rates as far as possible. Under this policy, the export-oriented sectors of the Swiss economy performed rather sluggishly while housing investment and house prices were driven up markedly by low interest rates. This has raised fears about the buildup of a housing bubble. Meanwhile, however, the housing boom has calmed down gradually without turning into a crash. This paper seeks to provide a theoretical and empirical basis for these developments. It analyzes the relationship between exchange rate shocks, the reaction of monetary policy and the resulting repercussions on the housing market in the framework of an econometric macro model. The stock-flow dynamics in the housing market allow for the possibility of a boom-bust cycle: An excess of housing demand over the existing housing stock and increasing house prices interact in a self-enforcing process, until an excessive level of house prices initiates a turnaround. The econometric analysis supports this view but also shows that the turnaround takes place rather smoothly as long as the strength of the Swiss franc and low interest rates persist. More prone to produce a pronounced downturn in the housing market is a scenario in which the upward pressure on the Swiss franc weakens so that interest rates increase after the initial decline.

Keywords: Monetary policy; Housing bubble (search for similar items in EconPapers)
JEL-codes: E31 E37 E52 E58 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s41549-016-0011-4

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