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MONETARY POLICY, HOUSING BOOMS, AND FINANCIAL (IM)BALANCES

Published online by Cambridge University Press:  03 September 2012

Sandra Eickmeier  and
Boris Hofmann
Sandra Eickmeier
Affiliation:
Deutsche Bundesbank
Boris Hofmann*
Affiliation:
Bank for International Settlements
*
Address correspondence to: Boris Hofmann, Bank for International Settlements, Centralbahnplatz 2, 4002 Basel, Switzerland; e-mail: boris.hofmann@bis.org.
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Abstract

This paper applies a factor-augmented vector autoregressive model to U.S. data with the aim of analyzing monetary transmission via private sector balance sheets, credit risk spreads, and house prices and of exploring the role of monetary policy in the housing and credit boom prior to the global financial crisis. We find that monetary policy shocks have a persistent effect on house prices, real estate wealth, and private sector debt and a strong short-lived effect on risk spreads in money and mortgage markets. Moreover, the results suggest that monetary policy contributed considerably to the unsustainable precrisis developments in housing and credit markets. Although monetary policy shocks contributed discernibly at a late stage of the boom, feedback effects of other (macroeconomic and financial) shocks via lower policy rates kicked in earlier and appear to have been considerable.

Keywords

Monetary PolicyPrivate Sector Balance SheetsAsset PricesHousing

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Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 4 , June 2013 , pp. 830 - 860
Copyright
Copyright © Cambridge University Press 2012 

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