The credit channel of monetary policy and housing markets : International empirical evidence

Abstract

This paper tests for the presence of a credit channel (particularly a bank-lending sub-channel) for monetary policy in the housing market.We argue that the importance of this channel for investment in residential housing is highly dependent on the structural features, and particularly the efficiency and institutional organization, of housing finance.We employ a VAR methodology to analyse this issue with respect to the housing markets of four European countries (Finland, Germany, Norway and the United Kingdom), which differ greatly in terms of structural features.Our results are generally consistent with the existence of a broad credit channel, whereas the bank-lending channel seems to be operational only under certain conditions.More importantly, our results are consistent with previous analyses of housing market efficiency, which strongly suggests the existence of a clear relationship between the presence of a credit (bank lending) channel, the efficiency level of housing finance, and the type of institutions that are active in mortgage provision. Keywords: monetary transmission, bank lending channel, house prices, vector autoregressions