The Housing Bubble: Monetary Policy or Global Imbalances?
28 Pages Posted: 1 Apr 2012
Date Written: March 5, 2012
Two recent empirical papers have presented results indicating that the U.S. Federal Reserve deserved much blame as a cause of the latest boom and bust in house prices and activity. Both papers are important contributions, but neither study allows for the impact of long-term interest rates, which are more affected by global factors than the Fed-controlled federal funds rate. In this paper, we include both the thirty-year mortgage rate as well as the fed funds rate as determinants of housing variables. Our results indicate that the long-term rate has independent predictive power for housing when included in equations along with the short-term funds rate. Indeed in some cases, the long-term rate is highly significant while the funds rate is not. We also show that in more recent years, the impact of the funds rate on housing has fallen relative to that of the mortgage rate; indeed in the case of house prices, the mortgage rate is highly significant while the funds rate exhibits barely any effect. Finally, we demonstrate through structural change tests that the mortgage rate does not simply proxy for monetary policy, and that the impact of the funds rate on long-term borrowing costs has also fallen through time. This latter finding is in accord with research showing the increased impotence of individual central banks with respect to long term interest rates.
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