Monetary Policy and Housing Market: Bayesian VAR Analysis using Sign Restrictions

Abstract

This paper examines the dynamic impact of monetary policy shocks on the Korean housing market using a Bayesian VAR model. I identify the monetary policy shocks by imposing a mixture of zero, range, and sign restrictions on the responses of variables, and analyze the impact of the shocks by means of impulse response functions and forecast error variance decompositions. Data covers the period from January 2006 to December 2017. The results are as follows: First, monetary policy shocks give rise to bigger impacts on housing transaction volume than on housing price. Second, monetary policy shocks bring about larger effects on the housing market than on the macro goods market. Third, the impacts of monetary policy shocks on housing price get profoundly bigger with the inclusion of the financial crisis period data. Fourth, the effects of monetary policy shocks can be overrated if we do not set the proper limits to the range of mortgage rate change.