Don’t Fight the Fed? An Analysis of the Role of Monetary Policy in the Formation of Bubbles in the Housing Market
Name: Claira Schiffrik
Major: Economics
Advisor: Huiting Tian
This study provides an analysis of the relationship between monetary policy and the housing market and seeks to determine whether expansionary monetary policy contributes to the formation of bubbles in the housing market. Inspired by the 2008 Financial Crisis, an appreciation for the economic power of the Federal Reserve, and an understanding of the multi-causal nature of economic phenomena, this study aims to provide knowledge pertaining to the behavior of the housing market that may serve of use in the consideration of monetary policy decisions in the future. This study conducts a review of existing literature followed by an empirical analysis of both the relationship between monetary policy and the housing market and the identification of bubble formation in the housing market. A fixed-effects panel data regression is performed using the real interest rate and housing market indices for 12 cities as the independent and dependent variables, while controlling for population, income, and unemployment. The study also develops a method of bubble formation identification using housing index and rent index data. The results suggest that monetary policy does contribute to the formation of bubbles in the housing market.
Posted in Comments Enabled, Independent Study, Symposium 2023 on April 13, 2023.
9 responses to “Don’t Fight the Fed? An Analysis of the Role of Monetary Policy in the Formation of Bubbles in the Housing Market”
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You’ve done amazing work, and its exciting to see Wooster students looking into the housing price issue. I can see where around 2008, when the recession would have been going on. The housing index makes a significant drop and levels out till about 2012 and then begins rising drastically. Would the federal government have been using the monetary policy just before the increase?
Impressive work! How did you decide which 12 cities to focus on? Do you think you would have had different results if you had focused on different cities?
Congratulations, Claira! It’s so great to see what you’ve done in your major 🙂
Hi Adam! Thank you very much! Yes, in the years immediately preceding the 2008 crisis, starting around the early 2000s, the Fed began lowering the interest rate and held it down throughout that entire period, which is considered expansionary monetary policy. My results suggest that this contributed to the formation of the 2008 bubble. This is consistent with the findings of McDonalds and Stokes (2011), which concluded that the monetary policy invoked in the years before the crisis were a crucial factor in the development of the bubble.
Hi Leah! Thank you! The 12 cities studied were chosen because extensive housing price data was available for them through the S&P Case-Shiller Housing Price Index, which has been tracking monthly price changes in these cities for several decades. With these being major metropolitan areas, data for the other variables used in the regression was much more accessible as well. However, a limitation that I cited in my study was the lack of use of data for smaller, rural, and poorer areas of the country. If data for those areas had been included, it is possible the results would have been different. I recommend that further research on this topic includes this kind of data to improve the accuracy of the analysis.
Given this data do you think we are destined for another housing crisis, or given the data are we one the verge for another bubble? Are there other factors which suggest a bubble is less imminent than in 2008?
Sorry, I rephrased:
Given this data do you think we are on the trajectory for another housing crisis, or can we avoid another bubble? Are there other factors which suggest a bubble is less imminent than in 2008?
Sorry, I rephrased:
Given this data do you think we are on the trajectory for another housing crisis, or can we avoid another bubble? Are there other factors which suggest a bubble is less imminent than in 2008? Great work!
Outstanding work! I am also interested in how you selected the cities that were included in the analysis.