Effect of Conventional and Unconventional Monetary Policy Shocks on Housing Prices in Canada

Abstract

This paper investigates the relationship between monetary policy surprises and housing price in Canada. Using a credible approach to identify structural monetary policy shocks in Canada and a comprehensive Bayesian VAR model to analyze their effects on financial and macroeconomic variables, we find that both conventional monetary policy and quantitative easing shocks have a significant and persistent effect on housing prices in Canada. However, the inflationary effect of a quantitative easing shock is more pronounced than that of an easing target monetary policy surprise. Specifically, the peak effect of a 25-basis point expansionary conventional monetary policy shock is a 0.47 percentage point increase in real housing prices while a comparable quantitative easing surprise leads to a peak of   0.82 percentage point increase in real housing prices. In fact, if we rank the effects of the different monetary policy surprises on housing prices in Canada, we find that quantitative easing shocks have the largest effect, followed by target monetary policy shocks, while forward guidance shocks have the least impact on housing prices in Canada.

Keywords: Conventional Monetary policy Shocks, Forward Guidance Shocks, Quantitative Easing Shocks, Output, Interest Rates, Housing Prices