TITLE:
Monetary Policy, Fiscal Policy, and the Housing Bubble
AUTHORS:
John F. McDonald, Houston H. Stokes
KEYWORDS:
Housing Prices, Monetary Policy, Fiscal Policy
JOURNAL NAME:
Modern Economy,
Vol.6 No.2,
February
4,
2015
ABSTRACT: The paper employs monthly data to test alternative hypotheses for the
causes of the large increase and subsequent decline in U.S. housing prices
during the 2000-2010 decade. The empirical evidence using VAR modeling is
consistent with the hypothesis that Federal Reserve interest rate policy was a
cause of the movements in housing prices. In addition, federal fiscal policy
and interest rates on adjustable-rate mortgages are found to be associated with
housing prices. On the other hand, the interest rate on standard 30-year
mortgages and a measure of net capital flows from abroad were not related to
housing prices. Foreclosure rates were also important. The study finds that
foreclosures and housing prices interacted: more foreclosures produced lower
housing prices and lower housing prices generated more foreclosures.