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The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics

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Demary, Markus

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Abstract

This study analyses empirically the link between real house prices and key macro variables like prices, output and interest rates for ten OECD countries. We find out that a monetary policy shock lowers real house prices in all ten countries, where the interest rate shock explains between 12 and 24 percent of the fluctuations in house prices. Impulse responses indicate that house prices rise after an output shock in nine of ten countries. But we also find evidence that real estate prices have a large impact on these key macroeconomic variables. We find out that the house price shock is a germane aggregate demand shock because it raises output and prices and leads to increasing money market rates in all countries. The story behind this finding is that increasing house prices lead to an increase in households' net worth which leads to increasing consumption expentitures and thereby stimulates aggregate demand. This stimulus on aggregate demand leads to increasing output and inflationary pressures on which the central bank reacts by tightening monetary policy. We find out that 12 to 20 percent of output fluctuations and around 10 to 20 percent of price fluctuations can be traced back to the housing demand shock. Moreover, we find that these housing demand shocks are a key driver of money market rates. We conclude that this channel is empirically relevant.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15978.

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Date of creation: 08 May 2009
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Handle: RePEc:pra:mprapa:15978

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Related research
Keywords: Inflation; Monetary Policy; Housing Prices; Vectorautoregressions;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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  16. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February. [Downloadable!] (restricted)
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