Skip to main content Accessibility help
Hostname: page-component-78dcdb465f-f64jw Total loading time: 0.3 Render date: 2021-04-16T00:45:18.589Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "metricsAbstractViews": false, "figures": false, "newCiteModal": false, "newCitedByModal": true }


Published online by Cambridge University Press:  03 September 2012

Sandra Eickmeier
Deutsche Bundesbank
Boris Hofmann
Bank for International Settlements
E-mail address:


This paper applies a factor-augmented vector autoregressive model to U.S. data with the aim of analyzing monetary transmission via private sector balance sheets, credit risk spreads, and house prices and of exploring the role of monetary policy in the housing and credit boom prior to the global financial crisis. We find that monetary policy shocks have a persistent effect on house prices, real estate wealth, and private sector debt and a strong short-lived effect on risk spreads in money and mortgage markets. Moreover, the results suggest that monetary policy contributed considerably to the unsustainable precrisis developments in housing and credit markets. Although monetary policy shocks contributed discernibly at a late stage of the boom, feedback effects of other (macroeconomic and financial) shocks via lower policy rates kicked in earlier and appear to have been considerable.

Copyright © Cambridge University Press 2012 

Access options

Get access to the full version of this content by using one of the access options below.


Altunbas, Yener, Gambacorta, Leonardo, and Marqués-Ibañez, David (2009) An Empirical Assessment of the Risk-Taking Channel. Mimeo, European Central Bank.Google Scholar
Amir Ahmadi, Pooyan and Uhlig, Harald (2008) Identifying Monetary Policy Shocks in a Data-Rich Environment: A Sign Restriction Approach in a Bayesian Factor-Augmented VAR. Mimeo, Humboldt University of Berlin.Google Scholar
Bai, Jushan and Ng, Serena (2002) Determining the number of factors in approximate factor models. Econometrica 70 (1), 191221.CrossRefGoogle Scholar
Bai, Jushan and Ng, Serana (2006) Are more data always better for factor analysis? Journal of Econometrics 132 (1), 169194.Google Scholar
Banbura, Marta, Giannone, Domenico, and Reichlin, Lucrezia (2010) Large Bayesian VARs. Journal of Applied Econometrics 25 (1), 7192.Google Scholar
Bank for International Settlements (2007) 77th Annual Report. Basel.Google Scholar
Bank for International Settlements (2008) 78th Annual Report. Basel.Google Scholar
Benati, Luca and Mumtaz, Haroon (2008) U.S. Evolving Macroeconomic Dynamics. A Structural Investigation. Working paper 746, European Central Bank.Google Scholar
Bernanke, Ben S. (2002) Speech on “Deflation: Making Sure ‘It’ Doesn't Happen Here.” Presented at the National Economists Club, Washington, DC, 21 November.Google Scholar
Bernanke, Ben S., Boivin, Jean, and Eliasz, Piotr (2005) Measuring the effects of monetary policy: A factor-augmented vector autoregressive (FAVAR) approach. Quarterly Journal of Economics 120 (1), 387422.Google Scholar
Bernanke, Ben S. and Gertler, Mark (1989) Agency costs, collateral and business fluctuations. American Economic Review 79, 1431.Google Scholar
Bernanke, Ben S., Gertler, Mark, and Gilchrist, Simon (1996) The financial accelerator and the flight to quality. Review of Economics and Statistics 78 (1), 115.CrossRefGoogle Scholar
Bernanke, Ben S., Gertler, Mark, and Gilchrist, Simon (1999) The financial accelerator in a quantitative business cycle framework. In Taylor, John B. and Woodford, Michael (eds.), Handbook of Macroeconomics, vol. 1C, pp. 13411393. Amsterdam: Elsevier Science, North-Holland.CrossRefGoogle Scholar
Bernanke, Ben S., Gertler, Mark, and Watson, Mark W. (1997) Systematic monetary policy and the effects of oil price shocks. Brookings Papers on Economic Activity 1, 91142.CrossRefGoogle Scholar
Bernanke, Ben S. and Kuttner, Kenneth N. (2005) What explains the stock market's reaction to Federal Reserve policy? Journal of Finance 60 (3), 12211257.CrossRefGoogle Scholar
Bjørnland, Hilde and Jacobsen, Dag Henning (2008) The Role of House Prices in the Monetary Policy Transmission Mechanism in the US. Working paper 2008/24, Norges Bank.Google Scholar
Bjørnland, Hilde and Leitemo, Kai (2009) Identifying the interdependence between US monetary policy and the stock market. Journal of Monetary Economics 56, 275282.CrossRefGoogle Scholar
Boivin, Jean and Giannoni, Mark P. (2010) Global forces and monetary policy effectiveness. In Gertler, Mark and Galí, Jordi (eds.), International Dimensions of Monetary Policy, pp. 429478. Chicago: University of Chicago Press.CrossRefGoogle Scholar
Borio, Claudio(2008) The Financial Turmoil of 2007—A Preliminary Assessment and Some Policy Considerations. BIS working paper 251.Google Scholar
Borio, Claudio and Zhu, Haibin (2008) Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism? BIS working paper 268.Google Scholar
Brunnermeier, Markus K. (2009) Deciphering the liquidity and credit crunch 2007–08. Journal of Economic Perspectives 23 (1), 77100.CrossRefGoogle Scholar
Buiter, Willem(2009) Lessons from the 2007 Financial Crisis. CEPR Discussion Paper 6596.Google Scholar
Canova, Fabio and Gambetti, Luca (2009) Structural changes in the US economy: Is there a role for monetary policy? Journal of Economic Dynamics and Control 33 (2), 477490.CrossRefGoogle Scholar
Chamberlain, Gary and Rothschild, Michael (1983) Arbitrage, factor structure and mean–variance analysis in large asset markets. Econometrica 51, 13051324.CrossRefGoogle Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles L. (1996) The effects of monetary policy shocks: Evidence from the flow of funds. Review of Economics and Statistics 78 (1), 1634.CrossRefGoogle Scholar
Cogley, Timothy and Sargent, Thomas J. (2005) Drifts and volatilities: Monetary policies and outcomes in the post WWII US. Review of Economic Dynamics 8, 262302.CrossRefGoogle Scholar
Darracq Pariès, Matthieu and Notarpietro, Alessandro (2008) Monetary Policy and Housing Prices in an Estimated DSGE Model for the US and the Euro Area. Working paper 972, European Central Bank.Google Scholar
Del Negro, Marco and Otrok, Christopher (2007) 99 Luftballons: Monetary policy and the house price boom across states. Journal of Monetary Economics 54, 19621985.CrossRefGoogle Scholar
Eickmeier, Sandra and Ziegler, Christina (2008) How successful are dynamic factor models at forecasting output and inflation? A meta-analytic approach. Journal of Forecasting 27 (3), 237265.CrossRefGoogle Scholar
Federal Reserve Board (2009) Flow of Funds Accounts of the United States. Federal Reserve statistical release Z.1., second quarter.Google Scholar
Fry, Renee and Pagan, Adrian (2007) Some Issues in Using Sign Restrictions for Identifying Structural VARs. NCER working paper 14.Google Scholar
Gorton, Gary B. (2009) Information, liquidity, and the (ongoing) panic of 2007. American Economic Review 99 (2), 567572.CrossRefGoogle Scholar
Greenspan, Alan(1994) Testimony before the Committee on Banking, Housing, and Urban Affairs. United States Senate, 27 May.Google Scholar
Greenspan, Alan(2007) The Age of Turbulence. Adventures in a New World. New York: Penguin Press.Google Scholar
Hansen, Bruce E. (1992) Testing for parameter instability in linear models. Journal of Policy Modelling 14 (4), 517533.CrossRefGoogle Scholar
Iacoviello, Matteo(2005) House prices, borrowing constraints, and monetary policy in the business cycle. American Economic Review 95 (3), 739764.CrossRefGoogle Scholar
Iacoviello, Matteo and Neri, Stefano (2010) Housing market spillovers: Evidence from an estimated DSGE model. American Economic Journal: Macroeconomics 2, 125164.Google Scholar
Ionnadou, Vasso, Ongena, Steven, and Peydró, José-Luis (2008) Monetary Policy, Risk-Taking and Pricing: Evidence from a Quasi-natural Experiment. CentER discussion paper 2009-31 S, 1– 45.Google Scholar
Jarociński, Market and Smets, Frank (2008) House prices and the stance of monetary policy. Federal Reserve Bank of St. Louis Review 90 (4), 339365.Google Scholar
Jiménez, Gabriel, Ongena, Steven, Peydró-Alcalde, José-Luis, and Saurina, Jesús (2007) Hazardous Time for Monetary Policy: What Do Twenty-Three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk? CEPR discussion paper 6514.Google Scholar
Kashyap, Anil K., Stein, Jeremy C., and Wilcox, David W. (1993) Monetary policy and credit conditions: Evidence from the composition of external finance. American Economic Review 83 (1), 7898.Google Scholar
Kiyotaki, Nobuhiro and Moore, John H. (1997) Credit cycles. Journal of Political Economy 105, 211248.CrossRefGoogle Scholar
Kilian, Lutz(1998) Confidence intervals for impulse responses under departures from normality. Econometric Reviews 17, 129.CrossRefGoogle Scholar
Kohn, Donald L. (2008) Monetary Policy and Asset Prices Revisited. Presented at the Cato Institute's 26th Annual Monetary Policy Conference, Washington, DC, 19 November.Google Scholar
Lansing, Kevin J. (2008) Monetary Policy and Asset Prices. FRBSF Economic Letter 2008-34, October 31.Google Scholar
Leventis, Andrew(2008) Revisiting the Differences between the OFHEO and the S&P/Case–Shiller House Price Indexes: New Explanations. OFHEO research paper, available at Scholar
National Association of Realtors (2008) What's in a Price? A Comparison of National Home Price Series. Available at Scholar
Ng, Serena and Mönch, Emanuel (2011) A hierarchical factor analysis of U.S. housing market dynamics. Econometrics Journal 14 (1), C124.Google Scholar
Nyblom, Jukka(1989) Testing for the constancy of parameters over time. Journal of the American Statistical Association 84 (405), 223230.CrossRefGoogle Scholar
Paustian, Matthias(2007) Assessing sign restrictions. B.E. Journal of Macroeconomics—Topics 7 (1), article 23.Google Scholar
Peek, Joe and Wilcox, James A. (1991) The Measurement and Determinants of Single-Family House Prices. Working paper 91-7, Federal Reserve Bank of Boston.Google Scholar
Peersman, Gert(2005) What caused the early millennium slowdown? Evidence based on vector autoregressions. Journal of Applied Econometrics 20 (2), 185207.CrossRefGoogle Scholar
Schorfheide, Frank and Del Negro, Marco (2003) Take your model bowling: Forecasting with general equilibrium models. Federal Reserve Bank of Atlanta Economic Review, Fourth Quarter, 35–50.Google Scholar
Sims, Christopher A. and Zha, Tao (1998) Does Monetary Policy Generate Recessions? Working paper 98-12, Federal Reserve Bank of Atlanta.Google Scholar
Stock, James H. and Watson, Mark W. (2002) Macroeconomic forecasting using diffusion indexes. Journal of Business and Economic Statistics 20 (2), 147162.CrossRefGoogle Scholar
Stock, James H. and Watson, Mark W. (2005) Implications of Dynamic Factor Models for VAR Analysis. Working paper 11467, National Bureau of Economic Research.Google Scholar
Taylor, John B. (2007) Housing and monetary policy. In Housing, Housing Finance, and Monetary Policy. Proceedings of the Federal Reserve Bank of Kansas City Symposium in Jackson Hole, Wyoming, pp. 463476.CrossRefGoogle Scholar
Taylor, John B. (2009) The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong. Working paper 14631, National Bureau of Economic Research.Google Scholar
Uhlig, Harald(2005) What are the effects of monetary policy on output? Results from an agnostic identification procedure. Journal of Monetary Economics 52, 381419.CrossRefGoogle Scholar
Zhu, Haibin(2003) The Importance of Property Markets for Monetary Policy and Financial Stability. In BIS Papers 21: Real Estate Indicators and Financial Stability, 9–29.Google Scholar

Altmetric attention score

Full text views

Full text views reflects PDF downloads, PDFs sent to Google Drive, Dropbox and Kindle and HTML full text views.

Total number of HTML views: 0
Total number of PDF views: 331 *
View data table for this chart

* Views captured on Cambridge Core between September 2016 - 16th April 2021. This data will be updated every 24 hours.

Send article to Kindle

To send this article to your Kindle, first ensure is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the or variations. ‘’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

Available formats

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

Available formats

Reply to: Submit a response

Your details

Conflicting interests

Do you have any conflicting interests? *