Monetary Policy, Housing Fundamentals and Bubbles

This paper estimates the responses of housing prices to monetary policy shocks using data of 18 OECD countries and builds a two-stage panel VAR asset pricing model to investigate behaviors of housing bubbles and fundamentals. Also, we evaluate “leaning against the wind” monetary policy responding to fluctuations of housing prices and bubbles, associated with volatilities of main macroeconomic variables and welfare. Our main findings call for monetary policy rules to stabilize housing prices rather than the bubbles.