Abstract
This study attempts to examine the relationship between monetary policy and housing prices in India. We use monthly data from January 2009 to December 2018 of four variables- Housing Price Index (HPI), Real Effective Exchange Rate (REER), Gross Domestic Price (GDP), and interest rate for our estimations using the Autoregressive Distributive Lag (ARDL) Model. The results from the study show that the impact of monetary policy on housing prices is significant only on lag three; however, the coefficient is very small. The results from the ARDL model are also supported by the variance decomposition of housing price. The variance decomposition of housing prices highlights that monetary policy explains around 13 percent of the variation in housing prices over a period of ten months. Further, the accumulated impulse response function reveals that with one-unit shock to interest rate results in a -0.000875 unit change in housing price. The study stipulates that, since conventional monetary policy has a modest impact on housing prices, therefore, it is insignificant for addressing the problems of real estate in India.
Highlights
The debate about the relationship between monetary policy and the housing market was revitalised by the global financial crisis (GFC)
As a prelude to estimate the relationship between monetary policy and housing price, we checked the stationarity of the data by using Augmented Dickey Fuller (ADF) test and Phillip Perron (PP) test
The present study found a modest impact of monetary policy on housing prices
Summary
The debate about the relationship between monetary policy and the housing market was revitalised by the global financial crisis (GFC). One constituent argued that loose monetary policy contributed to the housing boom and its subsequent collapse (Singh & Nadkarni, 2017; Taylor, 2007), while Leamer (2007) suggests that speculative investment in real estate resulted in a crisis. Both views contain a specific amount of truth as the real estate market is found to serve as one of the channels through which monetary policy shocks transmit to the whole Economy (Dupor, 2005; Subramanian & Felman, 2019). Platen and Semmler (2009) argue that monetary policy is optimal only when there is the protection of wealth invested in risky assets
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