Off Track Monetary Policy and Housing
15 Pages Posted: 10 Nov 2020
Date Written: September 12, 2020
We find significant evidence of model mis-specification, in the form of neglected serial correlation, in the econometric model of the U.S. housing market used by Taylor (2007) in his critique of monetary policy following the 2001 recession. When we model that serial correlation, his model fails to replicate the historical paths of housing starts and house price inflation. Further modifications in the model allow us to capture both the housing boom and the bust. Our analysis suggests that a counterfactual monetary policy proposed by Taylor (2007) would not have averted the pre-financial crisis collapse in the housing market.
Keywords: Monetary Policy, Housing, Taylor Rule, Financial Crisis
JEL Classification: C22, E32, E52, G01
Suggested Citation: Suggested Citation