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Monetary Policy, Housing Booms and Financial (Im) Balances

68 Pages Posted: 26 Apr 2010  

Sandra Eickmeier

Deutsche Bundesbank

Boris Hofmann

Bank for International Settlements (BIS) - Monetary and Economic Department

Multiple version iconThere are 2 versions of this paper

Date Written: April 9, 2010

Abstract

This paper uses a factor-augmented vector autoregressive model (FAVAR) estimated on U.S. data in order to analyze monetary transmission via private sector balance sheets, credit risk spreads and asset markets in an integrated setup and to explore the role of monetary policy in the three imbalances that were observed prior to the global financial crisis: high house price inflation, strong private debt growth and low credit risk spreads. The results suggest that (i) monetary policy shocks have a highly significant and persistent effect on house prices, real estate wealth and private sector debt as well as a strong short-lived effect on risk spreads in the money and mortgage markets; (ii) monetary policy shocks have contributed discernibly, but at a late stage to the unsustainable developments in house and credit markets that were observable between 2001 and 2006; (iii) financial shocks have influenced the path of policy rates prior to the crisis, and the feedback effects of financial shocks via lower policy rates on property and credit markets are found to have probably been considerable.

Keywords: Monetary policy, asset prices, housing, private sector balance sheets, financial crisis, factor model

JEL Classification: E52, E44, C3, E3, E43

Suggested Citation

Eickmeier, Sandra and Hofmann, Boris, Monetary Policy, Housing Booms and Financial (Im) Balances (April 9, 2010). ECB Working Paper No. 1178. Available at SSRN: https://ssrn.com/abstract=1587947

Sandra Eickmeier (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
Frankfurt/Main D-60431
Germany

Boris Hofmann

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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