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Financial Liberalisation and the Sensitivity of House Prices to Monetary Policy: Theory and Evidence

Matteo Iacoviello () and Raoul Minetti

No 538, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We analyse the impact of financial liberalisation on the link between monetary policy and house prices. We present a simple model of a small open economy subject to credit constraints. The model shows that the higher the degree of financial liberalisation, the stronger is the impact of interest rate shocks on house prices. We then use vector autoregressions to study the role of monetary policy shocks in house price fluctuations in Finland, Sweden and UK, characterised by financial liberalisation episodes over the last twenty years. We find that the response of house prices to interest rate surprises is bigger and more persistent in periods characterised by more liberalised financial markets.

Keywords: House prices; monetary policy; financial liberalisation. (search for similar items in EconPapers)
JEL-codes: E52 E32 C32 R21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge and nep-ure
Date: 2002-10-01
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Published, The Manchester School

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