Money, credit, house prices and quantitative easing – the wavelet perspective from 1970 to 2016
Abstract
This paper investigates the relationship between money/credit growth and house price inflation for a sample of twelve developed countries. The novel application of the continuous wavelet transform showed significant but time-varying linkages between these two variables. During quantitative easing in the United States and the United Kingdom, growth of respectively broad money and bank credit was leading house price inflation for the 2-8 years cycle. In contrast to this, the Bank of Japan and the European Central Bank either did not assign a separate role to house prices in their reaction functions or the two central banks were not capable to significantly increase house prices by extending money/credit during the business cycle. The significant co-movements of financial variables and house prices around booming episodes warn us that a new asset price boom might appear within the length of a business cycle as a consequence of overly expansionary monetary policy. In the euro area, the significant, long run, and close to a one-for-one link between growth of M3 and house price inflation is an argument for the monetary pillar of the European Central Bank. The present study contributes significantly to the literature by introducing a novel application of a continuous wavelet transform to study the housing prices in relation to money, credit and quantitative easing. The article uses a long-term dataset covering a period of almost half a century to analyse their varying relationship in the short-run to the long-run and from the historical perspective.
Keyword : money and house prices, credit and house prices, wavelets, historical co-movements, quantitative easing, asset price booms
How to Cite
Ryczkowski, M. (2019). Money, credit, house prices and quantitative easing – the wavelet perspective from 1970 to 2016. Journal of Business Economics and Management, 20(3), 546-572. https://doi.org/10.3846/jbem.2019.9859
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Creel, J., Hubert, P., & Viennot, M. (2016). The effect of ECB monetary policies on interest rates and volumes. Applied Economics, 48(47), 4477-4501. https://doi.org/10.1080/00036846.2016.1158923
De Grauwe, P., & Ji, Y. (2014). The fragility of two monetary regimes: the European Monetary System and the Eurozone. International Journal of Finance & Economics, 20(1), 1-15. https://doi.org/10.1002/ijfe.1500
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Dembiermont, C., Drehmann, M., & Muksakunratana, S. (2013). How much does the private sector really borrow? A new database for total credit to the private nonfinancial sector, BIS Quarterly Review, March, 65-81. Retrieved from https://www.bis.org/publ/qtrpdf/r_qt1303h.htm
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Dursun-de Neef, H. Ö. (2018). The transmission of bank liquidity shocks: evidence from house prices. Review of Finance. rfy001. https://doi.org/10.1093/rof/rfy001
Engle, R. (2002). Dynamic conditional correlation. Journal of Business & Economic Statistics, 20(3), 339-350. https://doi.org/10.1198/073500102288618487
Ernst, E., & Saliba, F. (2018). Are house prices responsible for unemployment persistence? Open Economies Review, 29(4), 795-833. https://doi.org/10.1007/s11079-018-9494-z
European Central Bank. (2010). Enhancing monetary analysis, Frankfurt: European Central Bank.
Fairchild, J., Ma, J., & Wu, S. (2015). Understanding housing market volatility. Journal of Money, Credit and Banking, 47(7), 1309-1337. https://doi.org/10.1111/jmcb.12246
Fan, Y., & Gençay, R. (2010). Unit root tests with wavelets. Econometric Theory, 26(05), 1305-1331. https://doi.org/10.1017/s0266466609990594
Ferrero, A. (2015). House price booms, current account deficits, and low interest rates. Journal of Money, Credit and Banking, 47(S1), 261-293. https://doi.org/10.1111/jmcb.12202
Finocchiaro, D., & Von Heideken, V. Q. (2013). Do central banks react to house prices?. Journal of Money, Credit and Banking, 45(8), 1659-1683. https://doi.org/10.1111/jmcb.12065
Flor, M. A., & Klarl, T. (2017). On the cyclicity of regional house prices: new evidence for U.S. metropolitan statistical areas. Journal of Economic Dynamics & Control, 77, 134-156. https://doi.org/10.1016/j.jedc.2017.02.001
Gerdesmeier, D., Reimers, H., & Roffia, B. (2010). Asset price misalignments and the role of money and credit. International Finance, 13(3), 377-407. https://doi.org/10.1111/j.1468-2362.2010.01272.x
Gete, P. (2015). Discussion of Sá and Wieladek. Journal of Money, Credit and Banking, 47(S1), 257-260. https://doi.org/10.1111/jmcb.12201
Goodhart, C., & Hofmann, B. (2008). House prices, money, credit, and the macroeconomy. Oxford Review of Economic Policy, 24(1), 180-205. https://doi.org/10.1093/oxrep/grn009
Grinsted, A. J., Moore, C., & Jevrejeva, S. (2004). Application of the cross wavelet transform and wavelet coherence to geophysical time series, Nonlinear Processes in Geophysics, 11, 561-566. https://doi.org/10.5194/npg-11-561-2004
Grossmann, A., & Morlet, J. (1984). Decomposition of Hardy functions into square integrable wavelets of constant shape. SIAM Journal on Mathematical Analysis, 15(4), 723-736. https://doi.org/10.1137/0515056
Gu, C., Mattesini, F., & Wright, R. (2016). Money and credit redux. Econometrica, 84(1), 1-32. https://doi.org/10.3982/ecta12798
Gunn, C. M. (2018). Overaccumulation, interest, and prices. Journal of Money, Credit and Banking, 50(2-3), 479-511. https://doi.org/10.1111/jmcb.12468
Gupta, R., Jurgilas, M., & Kabundi, A. (2010). The effect of monetary policy on real house price growth in South Africa: a factor-augmented vector autoregression (FAVAR) approach. Economic Modelling, 27(1), 315-323. https://doi.org/10.1016/j.econmod.2009.09.011
Hedlund, A. (2018). Credit constraints, house prices, and the impact of life cycle dynamics. Economics Letters, 171, 202-207. https://doi.org/10.1016/j.econlet.2018.07.028
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