Global Housing Markets and Monetary Policy Spillovers: Evidence from OECD Countries
Posted: 21 Dec 2016
Date Written: December 20, 2016
What are the driving forces of housing market volatilities across countries within the context of financial globalization? To address this broad question, we integrate the Campbell-Shiller decomposition with a dynamic factor model and apply this approach to the housing price-rent ratios in 17 OECD countries. Our novel approach allows us not only to assess geographically the relative importance of global and country-specific factors in explaining the housing market volatilities, but also to distinguish economically between those housing market volatilities attributable to different economic driving forces including the expected rent growth, the expected risk free rate, and the housing risk premium, within global and country-specific factors respectively. We find that the housing market volatility for an average country is mainly driven by the global factors, especially during the years leading up to the 2007-2008 financial crisis. Furthermore, among the global factors it is the global housing risk premium component that is primarily responsible for the housing market volatility. Using a Structural Vector-Autoregressive (SVAR) model identified through the instrumental variable method, we find that an unexpected U.S. monetary policy tightening is typically followed by a persistent and statistically significant rise in the global housing risk premium with some lag to a run-up of the U.S. housing risk premium. Moreover, the local factor in U.S. housing risk premium tends to go up sharply around 2 years before a U.S. recession, and leads the global housing risk premium. Our findings are broadly in line with the credit or risk-taking channel of the monetary policy spillovers from the United States to the global financial markets.
Keywords: global housing markets, housing risk premium, global financial cycle, risk-taking channel, monetary policy spillover, dynamic factor model, Campbell-Shiller decomposition
JEL Classification: E44, E58, F36, F65, G15, R30
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