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Financial Liberalisation and the Sensitivity of House Prices to Monetary Policy: Theory and Evidence

Author

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  • Matteo Iacoviello

    (Boston College)

  • Raoul Minetti

    (Michigan State University)

Abstract

We analyse the impact of financial liberalisation on the link between monetary policy and house prices. We present a simple model of a small open economy subject to credit constraints. The model shows that the higher the degree of financial liberalisation, the stronger is the impact of interest rate shocks on house prices. We then use vector autoregressions to study the role of monetary policy shocks in house price fluctuations in Finland, Sweden and UK, characterised by financial liberalisation episodes over the last twenty years. We find that the response of house prices to interest rate surprises is bigger and more persistent in periods characterised by more liberalised financial markets.

Suggested Citation

  • Matteo Iacoviello & Raoul Minetti, 2002. "Financial Liberalisation and the Sensitivity of House Prices to Monetary Policy: Theory and Evidence," Boston College Working Papers in Economics 538, Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:538
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    References listed on IDEAS

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    1. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    2. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    3. Miles, David, 1992. "Housing markets, consumption and financial liberalisation in the major economies," European Economic Review, Elsevier, vol. 36(5), pages 1093-1127, June.
    4. Mr. Garry J. Schinasi & Mr. Willy A Hoffmaister, 1994. "Asset Prices, Financial Liberalization, and the Process of Inflation in Japan," IMF Working Papers 1994/153, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    House prices; monetary policy; financial liberalisation.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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