ME  Vol.6 No.2 , February 2015
Monetary Policy, Fiscal Policy, and the Housing Bubble
Abstract: The paper employs monthly data to test alternative hypotheses for the causes of the large increase and subsequent decline in U.S. housing prices during the 2000-2010 decade. The empirical evidence using VAR modeling is consistent with the hypothesis that Federal Reserve interest rate policy was a cause of the movements in housing prices. In addition, federal fiscal policy and interest rates on adjustable-rate mortgages are found to be associated with housing prices. On the other hand, the interest rate on standard 30-year mortgages and a measure of net capital flows from abroad were not related to housing prices. Foreclosure rates were also important. The study finds that foreclosures and housing prices interacted: more foreclosures produced lower housing prices and lower housing prices generated more foreclosures.
Cite this paper: McDonald, J. and Stokes, H. (2015) Monetary Policy, Fiscal Policy, and the Housing Bubble. Modern Economy, 6, 165-178. doi: 10.4236/me.2015.62014.

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