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Low interest rates and housing booms: the role of capital inflows, monetary policy and financial innovation
A number of OECD countries experienced an environment of low interest rates and a rapid Increase in real house prices and residential investment during the past decade. Different explanations have been suggested for the housing boom: expansionary monetary policy, capital inflows due to a global savings glut and excessive financial innovation combined with inappropriately lax financial regulation. In this study we examine the effects of these three factors on the housing market. We estimate a panel VAR for a sample of OECD countries and identify monetary policy and capital inflows shocks using sign restrictions. To explore how the effects of these shocks change with the structure of the mortgage market and the degree of securitization, we allow the VAR coefficients to vary with mortgage market characteristics. Our results suggest that both types of shocks have a significant and positive effect on real house prices, real credit to the private sector and residential investment. The response of housing variables to both types of shocks is stronger in countries with more developed mortgage markets. The amplification effect of mortgage-backed securitization is particularly strong for capital inflows shocks.
AUTHORS: Sa, Filipa; Wieladek, Tomasz; Towbin, Pascal