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Financial Liberalization And The Sensitivity Of House Prices To Monetary Policy: Theory And Evidence

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  • Matteo Iacoviello
  • Raoul Minetti

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 subjectto credit constraints. The model shows that the higher the degree of financial liberalizationis, the stronger is the impact of interest rate shocks on house prices. We then usevector autoregressions to study the role of monetary policy shocks in house price fluctuations in Finland, Sweden and the UK, characterized by financial liberalizationepisodes over the last 20 years. We find that the response of house prices to interestrate surprises is bigger and more persistent in periods characterized by more liberalized financial markets.

Suggested Citation

  • Matteo Iacoviello & Raoul Minetti, 2003. "Financial Liberalization And The Sensitivity Of House Prices To Monetary Policy: Theory And Evidence," Manchester School, University of Manchester, vol. 71(1), pages 20-34, January.
    • Handle: RePEc:bla:manchs:v:71:y:2003:i:1:p:20-34
    DOI: 10.1111/1467-9957.00332
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    1. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    2. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    3. Miles, David, 1992. "Housing markets, consumption and financial liberalisation in the major economies," European Economic Review, Elsevier, vol. 36(5), pages 1093-1127, June.
    4. Mr. Garry J. Schinasi & Mr. Willy A Hoffmaister, 1994. "Asset Prices, Financial Liberalization, and the Process of Inflation in Japan," IMF Working Papers 1994/153, International Monetary Fund.
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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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