Should the Fed take extra action for the recent housing bubble? Evidence from asymmetric transitory shocks

The paper provides fresh implications for monetary-policy timings and effectiveness by analyzing the roles of asymmetric transitory shocks in housing, real estate investment trust (REIT), and stock price returns under the asymmetric unobserved components framework. The findings show that asymmetric transitory shocks, which characterize Markov-switching low-growth regimes of asset markets, are evidently significant for all asset price returns given the exogenous nature. Noticeably, the year 2005 is the good timing of monetary policies since asymmetric transitory shocks acted as the underlying drivers of housing price dynamics in housing markets of New York, Los Angeles, Boston, Chicago and Washington. The results suggest that two out of three conditions of extra action are satisfied before the housing crisis. However, monetary policies may fail to forestall the recent housing bubbles in New York and Los Angeles as the crisis had already occurred because adverse transitory shocks no longer persist in the two metropolitan housing markets in 2007, the year of the nationwide housing crisis. Copyright Springer Science+Business Media New York 2015