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Liquidity, interest rates and house prices in the euro area: a DSGE analysis

Liquidity, interest rates and house prices in the euro area: a DSGE analysis PurposeThis study aims to build a two-country monetary union dynamic stochastic general equilibrium (DSGE) model with housing to assess how different shocks contributed to the increase in housing prices and credit in the European Economic and Monetary Union. One of the countries is calibrated to represent the core group in the euro area, while the other one corresponds to the periphery.Design/methodology/approachIn this paper, the authors explore how a liquidity shock (or a decrease in the interest rate) affects house prices and the real economy through the asset price and the collateral channel. Then, they analyze how a house price shock in the periphery and a technology shock in the core countries are transmitted to both economies.FindingsThe authors find that a combination of an increase in liquidity in the euro area coming from the common monetary policy, together with asymmetric house price and technology shocks, contributed to an increase in house prices in the euro area and a stronger credit growth in the peripheral economies.Originality/valueThis paper represents the theoretical counterpart to empirical studies that show, through macroeconometric models, the interrelation between liquidity and other shocks with house prices. Using a DSGE model with housing, the authors disentangle the mechanisms behind these empirical findings. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of European Real Estate Research Emerald Publishing

Liquidity, interest rates and house prices in the euro area: a DSGE analysis

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1753-9269
DOI
10.1108/JERER-03-2015-0014
Publisher site
See Article on Publisher Site

Abstract

PurposeThis study aims to build a two-country monetary union dynamic stochastic general equilibrium (DSGE) model with housing to assess how different shocks contributed to the increase in housing prices and credit in the European Economic and Monetary Union. One of the countries is calibrated to represent the core group in the euro area, while the other one corresponds to the periphery.Design/methodology/approachIn this paper, the authors explore how a liquidity shock (or a decrease in the interest rate) affects house prices and the real economy through the asset price and the collateral channel. Then, they analyze how a house price shock in the periphery and a technology shock in the core countries are transmitted to both economies.FindingsThe authors find that a combination of an increase in liquidity in the euro area coming from the common monetary policy, together with asymmetric house price and technology shocks, contributed to an increase in house prices in the euro area and a stronger credit growth in the peripheral economies.Originality/valueThis paper represents the theoretical counterpart to empirical studies that show, through macroeconometric models, the interrelation between liquidity and other shocks with house prices. Using a DSGE model with housing, the authors disentangle the mechanisms behind these empirical findings.

Journal

Journal of European Real Estate ResearchEmerald Publishing

Published: May 3, 2016

References