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Can Monetary Policy Lean against Housing Bubbles?

Christophe André (), Petre Caraiani, Adrian Cantemir Calin and Rangan Gupta ()

No 201877, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper investigates whether the counter-intuitive result of Gali and Gambetti (2015), where stock prices react positively to a monetary tightening, also holds for housing prices. Estimating a Bayesian VAR model based on an asset-pricing framework and allowing for rational bubbles for the United States, the United Kingdom and Canada, we find that housing prices respond negatively to a monetary policy shock, as common intuition would suggest. We also show, using a Markov Switching VAR model for the United States, that the response of housing prices to a monetary policy shock is not sensitive to the state of homebuyers sentiment. Hence, monetary policy can prove effective in fighting housing price bubbles. However, “leaning against the wind" has costs in terms of lost output while inflation becomes lower. Hence, before implementing such a policy, its relative efficiency and interactions with other policies, notably macro-prudential, need to be carefully considered.

Keywords: housing; bubbles; VAR; monetary policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ure
Date: 2018-11
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