Author(s)

John F. McDonald, Houston H. Stokes

University of Illinois at Chicago, Chicago, IL, USA.

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.

Housing Prices, Monetary Policy, Fiscal Policy

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.