Working Paper: NBER ID: w13682
Authors: John B. Taylor
Abstract: Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.
Keywords: housing; monetary policy; subprime mortgages
JEL Codes: E22; E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High housing inflation rates during this period (R31) | Reduction in delinquency and foreclosure rates in the subprime mortgage market (G21) |
| Decline in housing inflation (R31) | Sharp increase in delinquency and foreclosure rates in the subprime market (G21) |
| Deviation of the federal funds rate from its historical path during 2002-2005 (E52) | Significant boom in housing starts (R31) |
| Deviation of the federal funds rate from its historical path during 2002-2005 (E52) | Housing inflation (R31) |
| Federal funds rate (E43) | Housing starts (R31) |
| Federal funds rate (E43) | Housing price inflation (R31) |