Monetary Policy and the Housing Bubble

The causes of the housing bubble are investigated using Granger causality analysis and VAR modeling methods. The study employs the S&P/Case-Shiller aggregate 10 city monthly housing price index, available in the period 1987–2010/8, the 20 city monthly housing price index for 2000–2010/8, and the federal funds rate data for the period 1987–2010/8. The findings are consistent with the view that the interest rate policy of the Federal Reserve in the period 2001–2004 that pushed down the federal funds rate and kept it artificially low was a cause of the housing price bubble.

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