A Structural VAR Model for Estimating the Link between Monetary Policy and Home Prices in Israel
Dana Orfaig ()
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Dana Orfaig: Bank of Israel
No 2017.09, Bank of Israel Working Papers from Bank of Israel
In recent years, the marked increase in home prices in Israel has prompted the need to understand the impact of monetary policy on home prices, including the mag- nitude and persistence of that impact. This paper finds that in response to a positive shock of 1 percentage point in the Bank of Israel's monetary interest rate, nominal home prices decline by 2.6 percent, and real home prices decline by 1.1 percent (and in a symmetrical manner to a negative shock). A broad international comparison indicates that the impact on home prices in Israel of a monetary shock is similar to the average impact worldwide. This paper adds to a wide global research base, and proposes-apparently for the first time in Israel-a structural VAR examination of the dynamic links between monetary policy and home prices. The VAR structure takes into account the main variables in the economy that affect, and are affected by, this link. The main conclusion is that monetary shocks, on their own, were not a dominant factor in explaining the changes in home prices in the research period-from the second quarter of 1995 through the first quarter of 2015.
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