Do House Prices Influence the Effect of Monetary Policy Shocks on Private Consumption? -Evidence From Five EMU Member States

The aim of this thesis is to study the role of house prices in influencing the effect of monetary policy shocks on private consumption in five EMU member states during the period 1995Q1-2010Q4. The role of house prices may be increasingly important in effecting private consumption possibilities due to the deregulations of mortgage markets in many countries in recent years and the increasing availability of mortgage equity products. Moreover, this study investigates whether or not changing credit market conditions during a recession may have any influence on the role of house prices. Using structural VAR models to be able to identify the interest rate shocks, the response of consumption in the absence and presence of house prices is studied through impulse response analysis. The results show that house price sensitivity to monetary policy shocks is more pronounced in countries with more developed mortgage markets. While there was a visible and non-temporary divergence between the impulse responses of consumption in the two versions of the model (including and excluding house prices, respectively), this could not be proven to be statistically significant. Three out of five countries display a larger house price effect when using data from the whole period as opposed to the house price effect observed when using only data from the pre-crisis period, 1995Q1-2007Q2. However, the results were not statistically significant