The Credit Channel of Monetary Policy through the Housing Market : An Analysis with VAR sign restriction

Abstract

The main purpose of this paper is to verify that the credit channel of monetary policy, especially the balance sheet channel, is effective through the housing market. In general, the decrease in house price after the contractionary monetary policy is accompanied by the decrease in consumer loans and consumption level. For the analysis, VAR model is implemented and the shocks are identified with sign restrictions. To be specific, this paper estimates the effects of monetary policy shocks by imposing sign restrictions on the impulse responses of real GDP, prices including CPI and commodity price, non-borrowed reserves, total reserves and Federal Funds rate. And no restrictions are imposed on housing variables including house price, house quantity, mortgage rates and consumer loans and consumption level.

First, an indirect effect of an interest rate change which occurs through the change in house price would be analyzed. Second, a direct effect of an interest rate change which occurs through the mortgage rate would be analyzed. Finally, how the consumer loans are influenced would be analyzed which reflects a contraction of loan supply originated by the credit channel.