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The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics

The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics. June 2009 Markus Demary, Research Center for Real Estate Economics, demary@iwkoeln.de. The Link between House Prices and Key Macroeconomic Aggregates.

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The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics

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  1. The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics June 2009 Markus Demary, Research Center for Real Estate Economics, demary@iwkoeln.de

  2. The Link between House Prices and Key Macroeconomic Aggregates • A large fraction of households‘ net worth is invested in housing • Housing has the important part of being collateral for mortgage financing • A large fraction of private liabilities are mortgage loans • Changes in house prices change households‘ wealth and thereby households‘ consumption expenditures • Changes in house prices change households‘ borrowing constraints • Monetary policy moves translate to mortgage market rate changes • Housing demand may change during the business cycle • Housing might be a hedge against inflation Markus Demary, "Housing Price Dynamics", June 2009

  3. How Do House Prices and Macroeconomic Aggregates Interact? • Behavior at business cycle frequencies • How large is the volatility of the house price cycle? • How persistent are house price cycles? • Do they lead or lag the business cycle? • The interplay between house prices and macro variables • How do GDP, inflation and interest rates move house prices? • How do house prices move GDP, inflation and interest rates? • What are the relevant transmission channels? Markus Demary, "Housing Price Dynamics", June 2009

  4. Data and Methodology • Used Dataset • OECD dataset on real house prices, real GDP, GDP-deflator, money market rates • spannig the period 1970Q1 to 2005Q4, also used in several studies • Methodology 1: Hodrick-Prescott-filtered cyclical components • Volatilities, Autocorrelations and Cross-Correlations • Methodology 2: Vector-Autoregressions for the levels of the data series • Expected future time development after shock • Contribution of shocks • Assumption 1: time lag of inflation response to GDP • Assumption 2: time lag in inflation and GDP response to interest rates • Assumption 3: monetary policy reacts to inflation and GDP without a lag • Assumption 4: house prices react without a lag Markus Demary, "Housing Price Dynamics", June 2009

  5. House Prices Have the Most Volatile CycleVolatilities at Business Cycle Frequencies Markus Demary, "Housing Price Dynamics", June 2009

  6. House Prices Have the Most Persistent CycleAutocorrelations at Business Cycle Frequencies Markus Demary, "Housing Price Dynamics", June 2009

  7. Business Cycle ComovementsCorrelations between House Prices and ... Markus Demary, "Housing Price Dynamics", June 2009

  8. House Prices Move with GDPImpulse Responses to an Inflationary Shock ... Markus Demary, "Housing Price Dynamics", June 2009

  9. Aggregate Demand Pushes House PricesImpulse Responses to an Output Shock ... Markus Demary, "Housing Price Dynamics", June 2009

  10. House Prices Decline When Policy Tightens Impulse Responses to an Interest Rate Shock ... Markus Demary, "Housing Price Dynamics", June 2009

  11. The House Price Shock Pushes Aggregate DemandImpulse Responses to a House Price Shock ... Markus Demary, "Housing Price Dynamics", June 2009

  12. Interest Rates Drive House Price FluctuationsContribution of Shocks to ... to House Price Fluctuations Markus Demary, "Housing Price Dynamics", June 2009

  13. House Prices Drive Interest Rate FluctuationsContribution of House Price Fluctuations to ... Markus Demary, "Housing Price Dynamics", June 2009

  14. Conclusion and Outlook • Empirical assessment of the link between house price fluctuations and key macroeconomic aggregates • Empirical evidence that GDP and interest rates are a key macro driver of house prices • Empirical evidence that house price changes translate to changes in aggregate demand • House prices might be an indicator for future inflationary pressures and future recessions • Central banks might put weight on monitoring house prices Markus Demary, "Housing Price Dynamics", June 2009

  15. Thank You for Your Attention Markus Demary, "Housing Price Dynamics", June 2009

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