MONETARY LIQUIDITY AND THE BUBBLES IN THE U.S. HOUSING MARKET

I-Chun TSAI

doi:10.3846/1648715x.2014.973465

Abstract

Extant studies indicate that the excessive easing of monetary supplies can result in surplus liquidity, which can consequently facilitate the formation of asset bubbles. This study references data on house prices in the U.S. from January 1991 to August 2012 to explore the correlations between monetary liquidity and house price bubbles in the U.S. housing market. Fluctuations in house prices are classified as related to either fundamentals (the mean reversion behavior and responses to information of the current period) or bubbles (self-related behavior). Results show a significant correlation between the formation of housing bubbles and monetary supplies. Long-term easing of monetary supplies can cause housing marketing returns to deviate from fundamentals, which then results in an increase in continuous fluctuations in house prices and the likelihood of the formation of house price bubbles.

Highlights

Extant studies have indicated that loose monetary policies may be the primary cause of imbalance in the asset markets
The data representing the performance of the U.S housing market we collect for this study are housing price index for the entire nation
All the macroeconomic variables are obtained from the websites of the Bureau of Economic Analysis

Summary

Introduction

Extant studies have indicated that loose monetary policies may be the primary cause of imbalance in the asset markets. This work investigates the liquidity effect caused by monetary policies on the behavior of house prices and analyzes further how surplus monetary supplies affect the formation of house price bubbles. If easing monetary policy is the main reason for the strong and non-fundamental house price rise, the Fed should consider the influence of these policies on house prices to prevent it causes the housing bubble when implementing relevant monetary policies. Neglecting the influence of these policies may result in the emergence of a bubble or the collapse of the housing market

Objectives

Results

Conclusion