The real price of housing and money supply shocks: Time series evidence and theoretical simulations

I estimate the dynamic response of aggregate owner-occupied housing prices to money supply shocks and interpret these responses using a dynamic equilibrium model of the housing market that relies on the asset view of housing demand. Money supply shocks are identified empirically from a vector autoregression (VAR) using restrictions that are consistent with a wide class of theoretical models. Using monthly data, I find that money shocks have real effects on the housing market: both real housing prices and housing sales (new starts and existing homes) rise in the short-run in response to positive shocks to the money supply. Simulations of the theoretical model suggest that, for reasonable parameter values, the estimated price responses are generally consistent with the theory. (C) 2002 Elsevier Science (USA).