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Off-track monetary policy and housing

Published online by Cambridge University Press:  27 November 2024

Jaroslav Horvath ,
Fredj Jawadi Open the ORCID record for Fredj Jawadi [Opens in a new window]  and
Philip Rothman
Jaroslav Horvath
Affiliation:
Department of Economics, University of New Hampshire, Durham, NH, USA
Fredj Jawadi*
Affiliation:
University of Lille, IAE Lille School of Management, Lille, France
Philip Rothman
Affiliation:
Department of Economics, East Carolina University, Greenville, NC, USA
*
Corresponding author: Fredj Jawadi; Email: [email protected]
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Abstract

We find significant evidence of model misspecification, in the form of neglected serial correlation, in the econometric model of the U.S. housing market used by Taylor (2007) in his critique of monetary policy following the 2001 recession. When we account for that serial correlation, his model fails to replicate the historical paths of housing starts and house price inflation. Further modifications allow us to capture both the housing boom and the bust. Our results suggest that the counterfactual monetary policy proposed by Taylor (2007) would not have averted the pre-financial crisis collapse in the housing market. Additional analysis implies that the burst of house price inflation during the COVID-19 pandemic was not caused by the deviations from the Taylor rule that occurred during this period.

Keywords

Monetary policyhousingTaylor rulefinancial crisis
Type
Articles
Information
Macroeconomic Dynamics , Volume 29 , 2025 , e60
Copyright
© The Author(s), 2024. Published by Cambridge University Press

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