Abstract
The paper provides fresh implications for monetary-policy timings and effectiveness by analyzing the roles of asymmetric transitory shocks in housing, real estate investment trust (REIT), and stock price returns under the asymmetric unobserved components framework. The findings show that asymmetric transitory shocks, which characterize Markov-switching low-growth regimes of asset markets, are evidently significant for all asset price returns given the exogenous nature. Noticeably, the year 2005 is the good timing of monetary policies since asymmetric transitory shocks acted as the underlying drivers of housing price dynamics in housing markets of New York, Los Angeles, Boston, Chicago and Washington. The results suggest that two out of three conditions of extra action are satisfied before the housing crisis. However, monetary policies may fail to forestall the recent housing bubbles in New York and Los Angeles as the crisis had already occurred because adverse transitory shocks no longer persist in the two metropolitan housing markets in 2007, the year of the nationwide housing crisis.
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Notes
The speech was made at the Cato Institute’s 26th Annual Monetary Policy Conference in Washington, D.C. in November 2008.
Although timings of recent housing busts vary across local housing markets, they prevailed between 2006 and 2008.
The Fed raised the effective federal funds rate from 2.34 % in January 2005 to 4.22 % in December 2005 (Fig. 2).
Case and Shiller (2003) had already pointed out that Los Angeles would suffer the most serious and longest housing-bubble burst among MSAs in the US. Case (2008) documents the housing price boom in Boston during 1984–1988, as well as the bubbles of California and Massachusetts in the 1980s and 1990s.
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Huang, M., Yeh, L. Should the Fed take extra action for the recent housing bubble? Evidence from asymmetric transitory shocks. J Econ Finan 39, 762–781 (2015). https://doi.org/10.1007/s12197-014-9281-7
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DOI: https://doi.org/10.1007/s12197-014-9281-7