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Stanimira Milcheva and Steffen Sebastian University of Regensburg

Housing Channels of Monetary Policy Transmission in European Industrial and Transition Countries. Stanimira Milcheva and Steffen Sebastian University of Regensburg. Motivation.

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Stanimira Milcheva and Steffen Sebastian University of Regensburg

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  1. Housing Channels of Monetary Policy Transmission in European Industrial and Transition Countries Stanimira Milcheva and Steffen SebastianUniversity of Regensburg

  2. Motivation What is the role of the housing market in the monetary policy transmission to consumption and residential investment? Hypothesis: Housing markets play an important role for the transmission of monetary shocks to consumption and investment in countries with flexible and well developed mortgage markets. Milcheva • Housing Channels of Monetary Policy Transmission

  3. Monetary policy shock Interest rate channel Credit channel House Prices Tobin‘s Q effect Housing wealth effect Rents and savings effect Collateral effect Costofcapitaleffect Interest rate incomeeffect Residential investment Consumption Housing Channels of Monetary Policy Transmission Milcheva • Housing Channels of Monetary Policy Transmission

  4. Institutional factors Milcheva • Housing Channels of Monetary Policy Transmission

  5. Methodology • Estimation of vector autoregression (VAR) models for 21 European countries and the US. • Counterfactual simulation of impulse responses. (see Bernanke et al. (1997)) Milcheva • Housing Channels of Monetary Policy Transmission

  6. Existing Literature Ludvigson et al. (2002): SVAR with total wealth, counterfactual simulation, US, 1966:1 – 2000:3, insignificant effect of the wealth channel on consumption in the US. Giuliodori (2005): VAR with house prices, counterfactual simulation, 9 European industrial countries, 1979:3 – 1998:4, house prices play an important role for the transmission of monetary policy shocks to GDP in countries with well developed housing markets, such as Sweden, Spain, the Netherlands. Elbourne (2008): SVAR with house prices, counterfactual simulation, UK, 1987:M1 – 2003:M5, house prices play a small role in the monetary policy transmission mechanism. Milcheva • Housing Channels of Monetary Policy Transmission

  7. Contribution • A more in-depth study of the monetary policy transmission through housing • Broader sample of countries, including Central and Eastern European (CEE) countries • Same model applied to all countries • Accounting for structural breaks • Time period after the liberalisation of the mortgage markets • Specifying the role of each housing channel on consumption and investment • Accounting for significance of simulated impulse responses Milcheva • Housing Channels of Monetary Policy Transmission

  8. Data Countries • Industrial countries: AU, BE, DK, DE, GR, FI, FR, IR, IT, NL, NO, ES, SE, UK, US • CEE countries: BG, CZ, EE, HU, LT, PL, SI Estimation period From mid-1990s to 2008 (quarterly) Variablesconsumer price index household consumption gross fixed capital formation in housing house price index money market rate Milcheva • Housing Channels of Monetary Policy Transmission

  9. Results: Shock in IR HP Milcheva • Housing Channels of Monetary Policy Transmission

  10. Results: Shock in IR HP Milcheva • Housing Channels of Monetary Policy Transmission

  11. Countries with significant housing wealth/collateral effects Dark blue line: estimated impulse response of consumotion to an interest rate shock., red line: simulated impulse response. Milcheva • Housing Channels of Monetary Policy Transmission

  12. Countries with significant housing wealth/collateral effects Dark blue line: estimated impulse response of consumotion to an interest rate shock., red line: simulated impulse response, blue line: simulated respinse when GFCF=0 in consumotion equation. Milcheva • Housing Channels of Monetary Policy Transmission

  13. Results: Shock in HP GFCF Milcheva • Housing Channels of Monetary Policy Transmission

  14. Countries with significant Tobin‘s Q effects Dark blue line: estimated impulse response, red line: simulated impulse response of consumotion to an interest rate shock. Milcheva • Housing Channels of Monetary Policy Transmission

  15. Thank you! Milcheva • Housing Channels of Monetary Policy Transmission

  16. Milcheva • Housing Channels of Monetary Policy Transmission

  17. Milcheva • Housing Channels of Monetary Policy Transmission

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