Revisiting the Link between House Prices and Monetary Policy

This paper revisits the link between house prices and monetary policy using a data set on house prices provided by the Bank for International Settlements. It is found that a loose monetary policy unambiguously results in a rise in real house prices, and such an increase is statistically significant for 19 of the 20 countries studied here. Empirical results also show that for some countries (Belgium, Canada, Switzerland, Denmark, the Netherlands, Sweden, and South Africa), the interest rate shock can explain a large percentage of real house price movements. The response of house prices to monetary policy shocks varies between countries, and the strength of the relationship between house prices and monetary policy can be associated with financial liberalization. On the other hand, evidence shows that interest rate shock plays an important role in explaining recent house price hikes for Australia, Spain, Ireland, the Netherlands, the US, and South Africa. In particular, during 2002–2006, on average 24% of the house price hikes in the US can be attributed to monetary policy shocks. Finally, we also find evidence that central banks react to the housing market, particularly in those countries adopting a policy of inflation targeting.

Unwitting Architect

The global rise of neoliberalism since the 1970s is widely seen as a dynamic originating in the United States and the United Kingdom, and only belatedly and partially repeated by Germany. From this Anglocentric perspective, Germany's emergence at the forefront of neoliberal reforms in the eurozone is perplexing, and tends to be attributed to the same forces conventionally associated with the Anglo-American pioneers. This book challenges this ruling narrative. It recasts the genesis of neoliberalism as a process driven by a plenitude of actors, ideas, and interests. And it lays bare the pragmatic reasoning and counterintuitive choices of German crisis managers obscured by this master story. This book argues that German officials did not intentionally set out to promote neoliberal change. Instead they were more intent on preserving Germany's export markets and competitiveness in order to stabilize the domestic compact between capital and labor. Nevertheless, the series of measures German policy elites took to manage the end of golden-age capitalism promoted neoliberal transformation in crucial respects: it destabilized the Bretton Woods system; it undermined socialist and social democratic responses to the crisis in Europe; it frustrated an internationally coordinated Keynesian reflation of the world economy; and ultimately it helped push the US into the Volcker interest-rate shock that inaugurated the attack on welfare and labor under Reagan and Thatcher. From this vantage point, the book illuminates the very different rationale behind the painful reforms German state managers have demanded of their indebted eurozone partners.

Interest Rate Pass-Through and Consumption Response: The Deposit Channel

This study assesses a new mechanism — the deposit channel — in the transmission of interest rate shock to household consumption using an administrative panel dataset of financial transactions for Turkey. Our empirical strategy exploits variation in consumer's adherence to the Muslim laws that forbid earning interest and employs a standard difference-in-difference design. Following an unanticipated announcement of interest rate hike, rate-sensitive consumers significantly reduce their overall spending and the response persists throughout the post-announcement period. The response of debt payment, disparate exposure to inflation, and exchange rate, the demographic difference can hardly fully account for the documented consumption response heterogeneity.

The Interest Rate Sensitivity of Investment

The interest rate sensitivity of investment has often played an important role in macroeconomic models. However, many vector autoregressive (VAR) models do not include investment to the list of variables. In this paper, we empirically investigate the size and the evolution of the interest rate sensitivity of investment for the United States and the four largest European economies in the last few decades. We use a VAR model with four variables at quarterly frequency: real investment, real gross domestic product (GDP), inflation, and a measure of the short-term interest rate. In our VAR, the structural interest rate shock is identified under the assumption that macroeconomic quantities and inflation react to interest rate innovations with a lag. We test the appropriateness of this specification by comparing our approach with the identification of shocks derived from the changes in volatility approach. For the countries under consideration, we determine a date during either the 1980s or the 1990s where the interest rate sensitivity of investment began to decrease and became less responsive to monetary policy. In addition, we find that the interest rate sensitivity of investment has been higher in the United States than in Europe, particularly in the first subperiod. Zusammenfassung Die Zinssensitivität der Investitionen spielt oft eine große Rolle in theoretischen makroökonomischen Modellen. In dieser Studie untersuchen wir empirisch die Höhe und die zeitliche Änderung der Zinssensitivität der Investitionen für die Vereinigten Staaten und die vier größten europäischen Volkswirtschaften. Wir verwenden ein VAR-Modell mit vier Variablen: reale Investitionen, reales Bruttoinlandsprodukt, Inflation und kurzfristige Zinsen. In unserem VAR identifizieren wir den strukturellen Schock unter der Annahme, dass die realen makroökonomischen Variablen verzögert auf einen Zinsschock reagieren. Wir testen die Angemessenheit dieser Spezifikation, indem wir unsere Vorgehensweise mit der Identifikation durch den “changes in volatility approach” vergleichen. Wir finden heraus, dass entweder in den 1980er oder frühen 1990er Jahren ein Strukturbruch stattgefunden und sich die Zinssensitivität der Investitionen verringert hat. Interessanterweise zeigen unsere Resultate zudem, dass die Zinssensitivität der Investitionen in den Vereinigten Staaten höher gewesen ist als in den untersuchten europäischen Ländern – insbesondere bis in die 1980er Jahre. JEL Classification: E22, E43, E52

Detecting time variation in the price puzzle: a less informative prior choice for time varying parameter VAR models

This paper compares Bayesian estimators with different prior choices for the time variation of the coefficients of Time Varying Parameter Vector Autoregression models using Monte Carlo simulations. Since the commonly used prior choice only allows for a tiny amount of time variation, less informative priors are proposed. Additional empirical evidence on the time varying response of inflation to an interest rate shock is provided for USA. While a ‘price puzzle’ is detected for the period 1972–1979, the estimated response of inflation to an interest rate shock is negative for most other time periods.

Fiscal costs of monetary policy: indirect effects of an interest rate shock on Brazilian public net debt

ABSTRACT: The paper estimates the fiscal cost of an increase in the Brazilian policy interest rate - the SELIC - by considering not only the direct effect on the yield of public bonds that are indexed to the SELIC, but also indirect effects on: (i) the yield of public bonds that are indexed to the exchange rate and inflation, and (ii) the stock of public net debt through adjustments in the value of international reserves measured in domestic currency. Projections are based on the estimation of the relationship between interest rates, exchange rates and inflation by means of a vector auto-regression. We conclude that the inclusion of such indirect effects has an ambiguous effect on the response of the implicit interest rate on public net debt to shocks in the SELIC, when adjustments in the value of international reserves are not considered. However, the inclusion of the latter amplifies the fiscal cost of a more restrictive monetary policy. These results call for a better coordination between monetary, fiscal and exchange rate policies in Brazil.

WHAT DO WORKING CAPITAL AND HABIT TELL US ABOUT THE CO-MOVEMENT PROBLEM?

Empirical studies find that expenditures on both durable and nondurable goods fall following a contractionary monetary policy shock. However, in standard two-sector models with staggered nondurable goods prices and flexible durable goods prices, consumption of durables rises whereas that of nondurables falls in response to a contractionary policy shock. To resolve this co-movement problem, I extend the model to include a realistic financial friction that firms must pay for their productive inputs prior to production, i.e., working capital, along with habit formation in nondurable goods consumption. Following a positive interest rate shock, the working capital channel raises production costs, thereby discouraging production of both durable and nondurable goods. Furthermore, habit formation induces households to smooth the growth rate of nondurable goods consumption, and hence mitigates the fall in the nondurable goods sector. The model solves the co-movement problem and successfully generates a more sensitive response in the durable goods sector, as observed in the data.