Essays on monetary policy and asset price bubbles: evidence from the U.S. housing bubble
Date
2015
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Publisher
University of Delaware
Abstract
The link between monetary policy and bubbles in asset prices is investigated in two separate empirical studies as well as an examination of theoretical models of asset-price bubbles. Common methods used to estimate bubbles are discussed including difficulties of empirically identifying bubbles in asset prices, and whether a response from central banks is appropriate. To empirically explore the relationship between monetary policy and asset-price bubbles, I examine the recent housing bubble in the United States to determine if the Fed's use of expansionary policy during this time contributed to the run-up in house prices. Methods employed include OLS and generalized method of moments (GMM) to estimate empirical Taylor-type policy reaction functions. Granger causality analysis, impulse response functions, and forecast error variance decomposition are applied to VAR models to determine the impact of the Fed's loose monetary policy on the U.S. housing market. Separate specifications for the Fed's traditional interest rate targeting policy as well as recent non-traditional policies including quantitative easing are tested to examine any impact of these monetary policies on house prices. The findings are consistent with the view that the Federal Reserve held interest rates artificially low during the years of the housing bubble, and both traditional and non-traditional policies of the Fed in recent years impacted house prices.