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Monetary Policy and House Prices: A Cross-Country Study


Alan G. Ahearne


National University of Ireland, Galway (NUIG) - Department of Economics

John Ammer


U.S. Federal Reserve Board of Governors

Brian M. Doyle


Board of Governors of the Federal Reserve System

Linda Kole


Board of Governors of the Federal Reserve System - World Payments and Economic Activity Section

Robert F. Martin


Federal Reserve Board - International Finance Division

September 2005

FRB International Finance Discussion Paper No. 841

Abstract:     
This paper examines periods of pronounced rises and falls of real house prices since 1970 in eighteen major industrial countries, with particular focus on the lessons for monetary policy. We find that real house prices are pro-cyclical - co-moving with real GDP, consumption, investment, CPI inflation, budget and current account balances, and output gaps. House price booms are typically preceded by a period of easing monetary policy, but then diminishing slack and rising inflation lead monetary authorities to begin tightening policy before house prices peak. In a careful reading of official reports, speeches, and minutes, we find little evidence that foreign central banks have reacted to past episodes of rising real house prices beyond taking into account their implications for inflation and output growth. However, central bankers have expressed a range of opinions in the more recent policy debate with some willing in certain cases to raise policy rates to try to stem current and future surges in asset prices while others favor moral suasion or a hands-off approach. Finally, we characterize the risks associated with house-price reversals. Although mortgage lenders in some countries have significant exposure to house prices, the balance of evidence suggests that this exposure does not, in and of itself, pose a significant risk to financial stability. Nevertheless, the co-movement of both property prices and default rates with the business cycle means that losses on mortgage lending are likely to be higher when banks' other lines of business are also performing poorly.

Number of Pages in PDF File: 77

Keywords: asset prices, business cycles, bubbles, financial stability

JEL Classification: E44, E52, E58, F41

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Date posted: October 5, 2005  

Suggested Citation

Ahearne, Alan G. and Ammer, John and Doyle, Brian M. and Kole, Linda and Martin, Robert F., Monetary Policy and House Prices: A Cross-Country Study (September 2005). FRB International Finance Discussion Paper No. 841. Available at SSRN: http://ssrn.com/abstract=816946 or http://dx.doi.org/10.2139/ssrn.816946

Contact Information

Alan G. Ahearne
National University of Ireland, Galway (NUIG) - Department of Economics ( email )
Newcastle Road
Galway
Ireland
John Matthew Ammer
U.S. Federal Reserve Board of Governors ( email )
20th & C Streets NW
Washington, DC 20551
United States
202-452-2349 (Phone)
202-452-6424 (Fax)
Brian M. Doyle (Contact Author)
Board of Governors of the Federal Reserve System ( email )
20th and C Streets, NW
Washington, DC 20551
United States
202-785-6011 (Phone)
202-263-4843 (Fax)
Linda Kole
Board of Governors of the Federal Reserve System - World Payments and Economic Activity Section ( email )
20th and Constitution Avenue, N.W.
Washington, DC 20551
United States
Robert F. Martin
Federal Reserve Board - International Finance Division ( email )
20th and C Streets, NW
Washington, DC 20551
United States
202-872-7564 (Phone)
202-736-5638 (Fax)
HOME PAGE: http://www.rfmartin.com
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