studies specifically dealing with the impacts of monetary policy on house prices are
still quite scarce. For instance, Goodhart and Hofmann (2007) show that one could
use a baseline New Keynesian model as a theoretical benchmark, consisting of a
Phillips curve to describe the supply side of the economy and an IS curve to describe
the demand side. From a monetary policy perspective, the central parameters are
the strength and the significance of the links in the monetary transmission process
and the relative importance of backward-looking and forward-looking expectations
in the Phillips and the IS curve. As is well-known by now, the empirical literature
has delivered diverse and highly controversial results on both issues. Hence, in
an extended specification, Goodhart and Hofmann include property prices in the
case of the IS curve and show that this restores an empirically significant monetary
transmission mechanism.
Mishkin (2007) stresses the user cost of capital as an important determinant of
the demand for residential capital. In this context, lower interest rates in the wake
of higher money growth should influence mortgage rates and raise the demand for
housing capital by decreasing the user cost of capital. However, Mishkin focuses on
the effects of interest changes on house price changes and does not explicitly refer
to monetary aggregates. He finds empirical evidence in favour of a stable relation
between an interest rate shock and house price developments via the FRB/US model.
A more general strand of literature investigates the impact of monetary policy on
more generally defined asset price developments. One example is Congdon (2005)
who investigates the relationship between money supply (specified as broad money)
and asset price booms and finds empirical evidence in many cases. For instance,
he analyses the portfolio management of (other) financial institutions like pension
funds. There, he finds evidence in favour of a long-run stability of the money/asset
ratio (percentage of money in their portfolios) and argues - similar to Meltzer (1995)
- that increases in the money supply leads to ”too much money chasing too few
assets” meaning that asset prices rise in order to restore the money/asset ratio.
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