What Role Does the Housing Market Play for the Macroeconomic Transmission Mechanism?

Mats Wilhelmsson

doi:10.3390/jrfm13060112

Abstract

The main objective is to answer the question: What role does the housing market play for the transmission mechanism and (in particular) is the impact constant over time? The research question also includes analyzing the importance of the housing market for the transmission mechanism. We estimate an eight-variable structural vector autoregression (SVAR) model of the Swedish economy over the period 1993 and 2018 using quarterly data, covering both the internet bubble in 2000 and the financial crises in 2008. The results indicate that interest rates have both a direct effect on housing prices and an indirect impact through the bank lending channel. Over time, the traditional interest rate channel importance has been stable. On the other hand, the role of the bank lending channel has increased over time. Household debt has increased substantially in Sweden and elsewhere. That means that the interest rate sensitivity in society has increased. Based on the results, it is possible to evaluate and forecast potential house price effects (both direct and indirect) when the interest rate changes.

Highlights

Macroeconomics is about how fiscal and monetary policy influence how much a country produces, the overall price level, and the unemployment level (Abel et al 2014)
The bank lending channel has become stronger after, and the liquidity channel has become weaker after the financial crisis
Implications From a theoretical point of view, we can assume that an expansive monetary policy will decrease bank lending channel has become stronger after, and the liquidity channel has become weaker after the financial crisis

Summary

Introduction

Macroeconomics is about how fiscal and monetary policy influence how much a country produces, the overall price level, and the unemployment level (Abel et al 2014). With government spending and taxes, means that that there is a direct impact on aggregate demand and supply. The central bank intends to influence the interest rate via, for example, money supply, which in turn can affect, for example, consumption and the aggregated demand. An increase in the money supply implies that interest rates fall, and the exchange rate depreciates in an open economy, which increases consumption and GDP. The effect of a change in interest rates will have an impact on output and price level, but it will affect, for example, exchange rates and asset prices. Low-interest rates tend to increase house prices and bank lending

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