Housing and the changing impact of monetary policy

Abstract

Housing is the leading indicator of the business cycle. The impact of monetary policy on housing has thus unsurprisingly been the subject of numerous studies. Some have also investigated whether the impact of monetary policy has changed since the mid-1980s. These papers to date have relied on vector-autoregressions (VARs). To avoid some of the specification issues of VARs, we employ the local projection method. We find a clear effect of monetary shocks on housing variables over the entire sample. However, we also find that over the great moderation of 1983–2008, there is no significant impact of policy shocks on either home prices or investment. Moreover, as the difference between the estimated impact of monetary policy on GDP before and during the great moderation was not as large as the same difference for residential investment, we infer that changes to housing finance, rather than simply more stable monetary policy, deserve some credit for the lesser impact of Fed shocks. Finally, we find that during the zero lower bound years spanning 2009–2020, unconventional monetary policy (UMP) appears to have had a palpable impact on the housing sector. This result is consistent with previous findings on the effectiveness of UMP.