Monetary Policy, Fiscal Policy, and the Housing Bubble

John F. McDonald, Houston H. Stokes

University of Illinois at Chicago, Chicago, IL, USA.

DOI: 10.4236/me.2015.62014                

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.

Keywords

Housing Prices, Monetary Policy, Fiscal Policy

Conflicts of Interest

The authors declare no conflicts of interest.

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