Abstract
The causes of the housing bubble are investigated using Granger causality analysis and VAR modeling methods. The study employs the S&P/Case-Shiller aggregate 10 city monthly housing price index, available in the period 1987–2010/8, the 20 city monthly housing price index for 2000–2010/8, and the federal funds rate data for the period 1987–2010/8. The findings are consistent with the view that the interest rate policy of the Federal Reserve in the period 2001–2004 that pushed down the federal funds rate and kept it artificially low was a cause of the housing price bubble.
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Notes
The policy variables tested by Bernanke and Blinder (1992) included two measures of the money supply, the Treasury bill rate, and the 10-year Treasury bond rate. The macroeconomic variables included industrial production, capacity utilization, employment, unemployment rate, housing starts, personal income, retail sales, consumption, and durable-goods orders. Their tests consisted of forecasting each of these variables using six lags of the variable itself, the policy variable in question, and the consumer price index. The result that the federal funds rate Granger-causes housing starts suggests a similar result for housing prices.
See Mikhed and Zemcik (2009) for detailed tests for the presence of bubbles in U.S. metropolitan housing markets from 1978 to 2006 using data on price-rent ratios. Their results suggest the presence of housing price bubbles in the late 1980s, the early 1990s, and from the late 1990s to 2006. See Das et al. (2010) for time-series forecasting models of housing prices at the census division level. Several studies have used time-series methods to study housing permits and starts, the most recent of which is Vargas-Silva (2008).
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McDonald, J.F., Stokes, H.H. Monetary Policy and the Housing Bubble. J Real Estate Finan Econ 46, 437–451 (2013). https://doi.org/10.1007/s11146-011-9329-9
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DOI: https://doi.org/10.1007/s11146-011-9329-9