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Did monetary policy fuel the housing bubble? An application to Ireland

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  • Moons, Cindy
  • Hellinckx, Kevin

Abstract

This paper provides empirical evidence of the role of the euro in the genesis of the recent Irish financial-economic crisis. By using a Taylor rule we measure the appropriateness of the ECB’s one-size-fits-all policy rate for the Irish economy. A counterfactual analysis suggests that the Irish interest rate should have been on average 6.5% higher. Using a BVAR and multivariate housing model, we provide econometric evidence that under an alternative sovereign monetary policy, the average house price would have been 25–30% lower just before the housing bust. In addition, it shows that a monetary policy tailored to the needs of the member state prevents housing prices from dramatically increasing.

Suggested Citation

  • Moons, Cindy & Hellinckx, Kevin, 2019. "Did monetary policy fuel the housing bubble? An application to Ireland," Journal of Policy Modeling, Elsevier, vol. 41(2), pages 294-315.
    • Handle: RePEc:eee:jpolmo:v:41:y:2019:i:2:p:294-315
    DOI: 10.1016/j.jpolmod.2019.03.006
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    Cited by:

    1. Tsai, I-Chun & Lin, Che-Chun, 2022. "A re-examination of housing bubbles: Evidence from European countries," Economic Systems, Elsevier, vol. 46(2).

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    More about this item

    Keywords

    EMU; Monetary policy; Taylor-rule; Housing bubble;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F6 - International Economics - - Economic Impacts of Globalization

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