Has the Euro Common Currency Actually Increased Home Price Co-Movement?

Abstract

If there is a high level of synchronization among euro zone country housing markets, the European Central Bank can incorporate the housing sector into its monetary policy decisions. If such co-movement is low, however, the ECB would have a harder time setting policy. Given the importance of housing to the macroeconomy, such co-movement across euro zone countries has been the subject of a number of studies, using different methodologies and finding mixed results. In this study, we are the first to use endogenous break methods to explicitly test for whether the introduction of the euro has changed home value co-movement. We also employ informal correlation analysis. Endogenous break results indicate no increase in co-movement attributable to the euro, while correlation analysis is suggestive of a decrease in synchronization since the currency’s introduction. These results contradict previous claims on the impact of the common currency on house price synchronization.

Keywords: Housing Supply and Markets, International Business Cycles, Macroeconomic Issues of Monetary Unions

JEL Classification: R3, F44, F45