Monetary Policy Transmission and House Prices: European Cross Country Evidence∗

Preliminary Version This paper explores the importance of housing in European countries for the transmission of monetary policy. We use a pooled VAR model to generate impulse responses of key macroeconomic variables to a monetary policy shock taking special account of the reaction of real house prices. We cluster our sample of countries into two distinctive groups – a strong reaction group and a weak reaction group – using a novel approach, which refers to the response of real house prices to a monetary policy shock. Our results suggest that the reaction of macroeconomic variables across the groups of countries is related to the volatility of real house prices, as we find that the impact of monetary policy in the strong reaction group is more pronounced