Financial Market Liberalization, Monetary Policy, And Housing Sector Dynamics

Abstract

This paper considers how monetary policy, a Federal funds rate shock, affects the dynamics of the US housing sector and whether the financial market liberalization of the early 1980s influenced those dynamics. The analysis uses impulse response functions obtained from a large-scale Bayesian vector autoregressive model at the national and four census regions. Overall, a 100 basis point Federal funds rate shock produces larger effects on real house prices, both at the regional level and the national level, in the post-liberalization period when compared to the pre-liberalization era. While the precision of the estimates do not imply significant differences, the finding does offer a caution. That is, the housing market appears more sensitive to monetary policy shocks in the post-liberalization period. Thus, the monetary authorities may need to exercise more care in implementing Federal funds rate adjustments going forward. Finally, we find that the reaction of housing sector proves heterogeneous across regions.