Housing Supply, Monetary Policy and US Economy: A Time-Varying Approach

Abstract

This paper studies the role of housing in the US economy since 1971. The focus is on the impact of the housing and mortgage markets on the business cycle and monetary transmission mechanisms. A ten-variable non-recursive TVP-SV-SVAR is used to address several issues. I disentangle the effect of housing demand and supply shocks on the US business cycle and mortgage market. Additionally, I discuss the interactions between the US housing market and Fed monetary policy. Finally, the impact of mortgage credit shocks on the US business cycle and the housing market is examined. The evidence shows: (i) housing supply shocks constitute an important source of US business cycle fluctuations; (ii) the volatility of housing supply shocks peaks during the 2007-2009 financial crisis; (iii) housing demand shocks play no significant role in the US business cycle and in determining mortgage rates; (iv) monetary policy has had a substantial effect on the US housing market since 1971; (v) mortgage credit supply shocks have a considerable effect on housing supply.

Keywords: mortgage credit supply, monetary transmission mechanism, stochastic volatility, time-varying parameters, Bayesian, Housing

JEL Classification: E31, E32, E44, E52