Financial Liberalization and the Sensitivity of House Prices to Monetary Policy: Theory and Evidence

15 Pages Posted: 13 Mar 2003

See all articles by Matteo M. Iacoviello

Matteo M. Iacoviello

Federal Reserve Board - Trade and Financial Studies

Raoul Minetti

Michigan State University - Department of Economics

Abstract

We analyse the impact of financial liberalization on the link between monetary policy and house prices. We present a simple model of a small open economy subject to credit constraints. The model shows that the higher the degree of financial liberalization is, the stronger is the impact of interest rate shocks on house prices. We then use vector autoregressions to study the role of monetary policy shocks in house price fluctuations in Finland, Sweden and the UK, characterized by financial liberalization episodes over the last 20 years. We find that the response of house prices to interest rate surprises is bigger and more persistent in periods characterized by more liberalized financial markets.

Suggested Citation

Iacoviello, Matteo M. and Minetti, Raoul, Financial Liberalization and the Sensitivity of House Prices to Monetary Policy: Theory and Evidence. Manchester School, Vol. 71, pp. 20-34, 2003. Available at SSRN: https://ssrn.com/abstract=381649

Matteo M. Iacoviello (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Raoul Minetti

Michigan State University - Department of Economics ( email )

101 Marshall Hall
East Lansing, MI 48824
United States
517-355-7349 (Phone)
517-432-1068 (Fax)

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