The Role of Housing Prices in the Transmission Mechanism of Monetary Policy

This paper provides a discussion of the housing market channels of the monetary transmission mechanism. We use quarterly data from 1992-2008(2) to estimate a VAR model. Applying a two-stage approach, we first identify the effects of monetary shocks on housing prices, and then we investigate the relative role of the policy-induced fluctuations in housing prices on private consumption. We find that the housing prices are significantly affected by the monetary policy shocks. Findings show that housing prices enhance the effects of monetary shocks on consumer spending through wealth effects and balance sheet effects of housing price, which dominate its saving effect.