Housing and Monetary Policy

Thursday, February 14, 2008 | 09:15 AM

Interesting academic work on Housing Prices, Monetary Policy, and Subprime issues from Stanford's John B. Taylor.  Incidentally, if you recognize the name Taylor -- as in Taylor rule -- they are one and the same  person.

Here's the abstract:

Housing and Monetary Policy   

Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counter-factual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.

That's the academic overview. I found Taylor's charts to be quite revealing:

Housing_prices_and_subprime_arm_del



Delinq_and_housing_prices

>
For those of you who want to get into the details, Taylor's academic paper (10 pages) is rather readable for an academic work.






Sources:
Housing and Monetary Policy
John B. Taylor
Stanford University, September 2007
http://tinyurl.com/26vznb

Housing and Monetary Policy
John B. Taylor
NBER Working Paper No. 13682
December 2007
JEL No. E22,E43,E52
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1077808

John B. Taylor Home Page
Mary and Robert Raymond Professor of Economics at Stanford University
Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution
http://www.stanford.edu/~johntayl/

Taylor Rules
Athanasios Orphanides
Board of Governors of the Federal Reserve System, January 2007    http://www.federalreserve.gov/Pubs/FEDS/2007/200718/200718pap.pdf

The Taylor Rule and the Transformation of Monetary Policy
Pier Francesco Asso, George A. Kahn, and Robert Leeson
Federal Reserve Bank of Kansas City, Research Division, December 2007
http://www.kansascityfed.org/Publicat/Reswkpap/RWP07-11.htm

Thursday, February 14, 2008 | 09:15 AM | Permalink | Comments (17) | TrackBack (0)
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Comments

Happy Joyce Hall day to all!

It is always nice when academia validates reality even if it is post facto.

What I found truely amazing was the herding effect the housing bubble had on otherwise very sensible people. I know of a lot of people that traded up in houses simply because they could.

Housing is a replacement cost business for the most part. The must haves in the 70's were atriums, conversation pits, foiled and flocked wall paper and of course resilient vinyl flooring in the kitchen and playroom. Gee, even Formica had a butcher block look counter top surface.

House prices today reflect better ingredients offset by lower carrying costs. Except for the really silly areas of the country, they are not as over priced as they seem. Can a house sell for under replacement cost? Of course. Just like equities...

Posted by: Ross | Feb 14, 2008 9:36:19 AM

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