Norges Bank

Working Paper

The role of house prices in the monetary policy transmission mechanism in the U.S.

Author:
By Hilde C. Bjørnland and Dag Henning Jacobsen
Series:
Working Paper
Number:
24/2008

Abstract
We analyze the role of house prices in the monetary policy transmission mechanism in the U.S. using structural VARs. The VAR is identified using a combination of short-run and long-run (neutrality) restrictions, allowing for a contemporaneous interaction between monetary policy and various asset prices. By allowing the interest rate and asset prices to react simultaneously to news, we find the role of house prices in the monetary transmission mechanism to increase considerably. In particular, following a monetary policy shock that raises the interest rate by one percentage point, house prices fall immediately by 1 percent, for then to decline by a total of 4-5 percent after three years. Furthermore, the fall in house prices enhances the negative response in output and consumer price inflation that has traditionally been found in the conventional literature.


 

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ISSN 1502-8190 (online)

Published 12 December 2008 14:33
Published 12 December 2008 14:33