Did monetary policy fuel the housing bubble? An application to Ireland |
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Authors: | Cindy Moons Kevin Hellinckx |
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Institution: | Ku Leuven campus Brussel, Department of Economics and Business, Warmoesberg 26, 1000 Brussel, Belgium |
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Abstract: | This paper provides empirical evidence of the role of the euro in the genesis of the recent Irish financial-economic crisis. By using a Taylor rule we measure the appropriateness of the ECB’s one-size-fits-all policy rate for the Irish economy. A counterfactual analysis suggests that the Irish interest rate should have been on average 6.5% higher. Using a BVAR and multivariate housing model, we provide econometric evidence that under an alternative sovereign monetary policy, the average house price would have been 25–30% lower just before the housing bust. In addition, it shows that a monetary policy tailored to the needs of the member state prevents housing prices from dramatically increasing. |
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Keywords: | E5 F6 EMU Monetary policy Taylor-rule Housing bubble |
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