The Role of Property Prices in the Conduct of Monetary Policy: Evidence from Down Under

Abstract

This paper examines link between property prices and monetary policy in New Zealand and Australia. Using an identified VAR model for open economies, we address two questions, i.e., whether a loose monetary policy cause house price appreciation, and whether central banks of the two countries conduct a policy of “leaning against the wind” by responding to house price shocks. Our findings suggest that, following an expansionary monetary policy shock, house prices inflations fall immediately. Yet, we find that the impact of monetary policy shocks on housing is small to modest in both countries. Furthermore, we find that the interest rate does not respond systematically to changes in house prices in New Zealand, whereas the Reserve Bank of Australia do respond systematically to fluctuations in housing price inflation.