FFR Level in the Period 2000-2007 and the Emergence of the Asset Price Bubble on the US Real Estate Market

• Autorzy: Małgorzata Karaś
• Języki publikacji: EN

Abstrakty

EN

This article aims at investigating the impact of the level of the Fed funds rate in the United States in the period 2000-2007 on the emergence of the asset price bubble on the US real estate market, burst of which triggered the financial crisis in the US and globally. Rather than constructing a single theoretical or empirical model of this potential influence, a more eclectic approach is taken. The argument is structured around three fundamental questions (1) whether the Fed funds rate had been low compared to benchmarks in the given period; (2) whether low short-term rate itself had been able inflate a real estate bubble; (3) whether alternative explanations of the bubble causes were sufficient. For each of the issues a number of qualitative explanations and quantitative models is provided and analysed. Based on the gathered data, models, and arguments, the paper concludes that the influence of the Fed funds rate on the bubble's emergence is not to be underestimated. This conclusion should be kept in mind in the context of future directions for monetary policy in the US and globally, as the extremely low interest rates applied by central banks to date might be inflating the next bubble. (original abstract)

Słowa kluczowe

EN

Monetary policy; Subprime loan; Financial crisis

PL

Polityka pieniężna; Kredyt subprime; Kryzys finansowy

• Czasopismo: Ekonomia / Uniwersytet Warszawski
• Rocznik: 2013
• Numer: nr 33
• Strony: 55--77

Twórcy

autor

Małgorzata Karaś

• Warsaw School of Economics, Poland, PhD student

Bibliografia

• Arghyrou M. G. (2008) Monetary policy before and after the euro: Evidence from Greece. Empirical Economics, Springer, vol. 36(3), June, pp. 621-643.
• Arghyrou M. G., Gadea M. D. (2008) The single monetary policy and domestic macro-fundamentals: Evidence from Spain. Cardiff Economics Working Papers E2008/23, Cardiff University.
• Acharya V., Richardson M. (eds) (2009) Restoring Financial Stability: How to Repair a Failed System. John Wiley & Sons, Inc., New Jersey.
• Allen W., Wood G. (2006) Defining and achieving financial stability. Journal of Financial Stability, vol 2, issue 2, pp. 152-172.
• Balassa B. (1964) The purchasing power parity doctrine: a reappraisal. Journal of Political Economy 72, pp. 584-596.
• Balcerowicz L. (2012) On the Prevention of Crises in the Eurozone. Paper presented at the European University Conference 'Governance for the Eurozone: Integration or Disintegration,', Florence, April 26.
• Bank of England (2009) The role of macroprudential policy. A Discussion Paper. November.
• Bank of Spain (2003) Annual report 2002. Banco de España, Madrid.
• Bank of Spain (2009) Informe Anual 2008. Banco de España, Madrid, pp. 187-88.
• Beynet P., Fuentes A., Gillingham R., Hagemann R. (2011) Restoring Fiscal Sustainability in Spain. OECD Economics Department Working Papers, No. 850, OECD Publishing.
• Bień A. (1988) Optymalny obszar walutowy .Teoria i praktyka. PWE, Warszawa.
• Bini Smaghi L. (2011) Eurozone, European crisis & policy responses. Speech at the Goldman Sachs Global Macro Conference, Hong Kong, 22 February.
• Blanchard O. (2006) Portugal, Italy, Spain, and Germany. The implications of a suboptimal currency area. Speech at the WEL-MIT meeting, NYC.
• Borio C. (2003) Towards a macroprudential framework for financial supervision and regulation? BIS Working. Papers, no 128, February.
• Borio C., Drehmann M. (2009) Towards an operational framework for financial stability: 'fuzzy' measurement and its consequences. BIS Working Papers, no 284, June.
• Buiter W. H. (2008) Central banks and financial crises. Financial Markets Group, Discussion Paper 619, London School of Economics, London, UK.
• Carney M. (2009) Some consideration on using monetary policy to stabilize economic activity. Remarks at Jackson Hole conference, Wyoming, 22 August.
• Caruana J. (2005) Monetary policy, financial stability and asset prices. Occasional Papers, 0507, Bank of Spain.
• Catalán M., Moretti M. (2006) Regulation, Supervision, and Governance of the Spanish Cajas. Spain: FSAP Technical Note, IMF Country Report No. 06/215.
• CEBS (2010) 2010 EU wide stress testing documents. Available online at http://www.eba.europa.eu/EuWideStressTesting.aspx
• Clarida R., Gali J., Gertler M. (1998) Monetary Policy Rules in Practice: Some International Evidence. European Economic Review, 42, pp. 1033-1067.
• Clement P. (2010) The term "macroprudential": origins and evolution. BIS Quarterly Review, March.
• Covitz D., Liang N., Suarez G. (2009) The Anatomy of a Financial Crisis: The Evolution of Panic-Driven Runs in the Asset- Backed Commercial Paper Market. Finance and Economics Discussion Series Working Paper 2009 36, Board of Governors of the Federal Reserve.
• Crockett A. (2000) Marrying the micro- and macroprudential dimensions of financial stability. BIS Speeches, 21 September.
• Davis A., McLennan S., (2006) Securitization in the United Kingdom. UK Tax Reforms Make Life Simpler. The 2006 Global Securitization Guide, Gide Loyrette Nouel MNP, p. 35.
• Diamond D. W., Dybvig P. (1983) Bank Runs, Deposit Insurance and Liquidity. Journal of Political Economy, 91(3), pp. 401-419.
• Fernandez de Lis S., García-Herrero A. (2010) Dynamic Provisioning: Some Lessons from Existing Experiences. ADBI Working Paper No. 218, May 26.
• Financial Stability Board (2011) Shadow Banking: Scoping the Issues. A Background Note of the Financial Stability Board.
• Fisher J. D. M., Quayyum S. (2006) The Great Turn-of the Century Housing Boom. Economic Perspectives, Federal Reserve Bank of Chicago, pp. 29-44.
• Flaig G., Wollmershaeuser T. (2007) Does the Euro-Zone Diverge? A Stress Indicators for Analyzing Trends and Cycles in Real GDP and Inflation. CESifo Working Paper No. 1937.
• Frankel J., Rose A. (1998) The Endogeneity of the Optimum Currency Area Criteria. Economic Journal, 108, pp. 1009-1025.
• Kaufman G. G. (2000) Banking and Currency Crises and Systemic Risk: A Taxonomy and Review. DNB Staff Reports 48, Netherlands Central Bank.
• Galati G., Moessner R. (2011) Macroprudential policy - a literature review. BIS Working Papers 337, Bank for International Settlements.
• Gallin J, (2003) The long-run relationship between house prices and income: evidence from local housing markets. United States Federal Reserve Board
• García-Herrero A., Fernandez de Lis S. (2008) The Housing Boom and Bust in Spain: Impact of the Securitisation Model and Dynamic Provisioning. Housing Finance International, September 2008.
• Garriga C., (2010) The Role of Construction in the Housing Boom and Bust in Spain. FEDEA Working Papers 2010-09.
• Goodhart C. (2010) The Role of Macro-Prudential Supervision. Speech at the Federal Reserve Bank of Atlanta 2010 Financial Markets Conference, Atlanta, Georgia, May 12.
• Gorton G. B. (2010) Slapped by the Invisible Hand: The Panic of 2007. Oxford University Press.
• Hanson S., Kashyap A., Stein J. (2011) A Macroprudential Approach to Financial Regulation. Journal of Economic Perspectives, American Economic Association, vol. 25(1), winter, pp. 3-28.
• Hart O., Zingales L. (2010) A New Capital Regulation for Large Financial Institutions. Available online: http://faculty.chicagobooth.edu/luigi.zingales/papers/A_New_Capital _Regulation_ALER_version.pdf.
• Hayo B., Hofmann B. (2006) Comparing monetary policy reaction functions: ECB versus Bundesbank. Empirical Economics 31, pp. 654-662.
• Haughwout A. F., Peach R. W., Sporn J., Tracy J. S. (2012) The Supply Side of the Housing Boom and Bust of the 2000s. FRB of New York Staff Report No. 556., March.
• International Monetary Fund (2009) Lessons for monetary policy from asset price fluctuations. World Economic Outlook, Chapter 3, Washington, October.
• International Monetary Fund (2010) Global Financial Stability Report. Washington, April.
• Jones C. (2012) The UK Housing Market Cycle and the Role of Planning: The Policy Challenge Following the Financial Crisis. In: Challenges of the Housing Economy: An International Perspective (eds. C. Jones, M. White, N. Dunse), Wiley-Blackwell, Oxford, UK.
• Kashyap A., Rajan R., Stein J. C. (2008) Rethinking Capital Regulation. In: Maintaining Stability in a Changing Financial System, pp. 431-71. Federal Reserve Bank of Kansas City.
• Kenen P. (1969) The theory of optimum currency areas: An eclectic View. In: Monetary Problems of the International Economy (eds. R. Mundell and A. Swoboda). University of Chicago Press, Chicago.
• Kim K., Suh S. (1993) Speculation and price bubbles in the Korean and Japanese real estate markets. Real Estate Finance Econ 6, pp. 73-87
• King M. (2009) Speech at the Lord Mayor's Banquet for Bankers and Merchants of the City of London at the Mansion House. London, England. 17 June.
• Kohansky G., Mitropoulos A., Thaker K. (2011) A Model of Sustainable House Prices for the UK. Fitch Ratings, September 6.
• Kohn D. (2008) Monetary policy and asset prices revisited. Speech to the Cato Institute's annual monetary policy conference, Washington DC.
• Krugman P. (1993) Lessons of Massachusetts for EMU. In: The Transition to Economic and Monetary Union in Europe (eds. F. Giavazzi, F. Torres). New York: Cambridge University Press, pp. 241-261.
• Lim C., Columba F., Costa A., Kongsamut P., Otani A., Saiyid M., Wezel T., Wu X. (2011) Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences. IMF Working Paper 11/238.
• Lopez-Garcia,M. A. (2004) Housing, prices and tax policy in Spain. Spanish Economic Review 6, pp. 29-52.
• Lopez-Salido D., Restoy F., Valles J. (2005) Inflation differentials in EMU: the Spanish case. Banco d'Espagna Working Paper Nr. 0514.
• Maclennan D., Muellbauer J., Stephens M. (1999) Asymmetries in Housing and Financial Market Institutions and EMU. CEPR Discussion Papers 2062, C.E.P.R. Discussion Papers.
• McKinnon R. (1963) Optimum currency areas. American Economic Review 53, pp. 717-725.
• McQuinn K., O' Reilly G., (2007) A Model of Cross-Country House Prices. Research Technical Papers 5/RT/07, Central Bank of Ireland.
• Modigliani F., Miller M. H. (1958) The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48(3): pp. 261-97.
• Mundell R. A. (1961) A theory of optimal currency areas. American Economic Review 51, pp. 657-665.
• Muellbauer J. (2007) Housing and Personal Wealth in a Global Context. Working Papers UNU-WIDER Research Paper, World Institute for Development Economic Research (UNU-WIDER).
• Myers S. C. (1977) Determinants of Corporate Borrowing. Journal of Financial Economics, 5(2), pp. 147-75.
• Myers S. C., Majluf N. (1984) Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have. Journal of Financial Economics, 13(2) pp. 187-222.
• OECD (2005) Economic Survey of Spain 2005. OECD Policy Brief, March.
• Persaud A. (2009) Macro-Prudential Regulation. ECMI (European Capital Markets Institute) Commentary, No. 25/4 August.
• Rogers J. H. (2007) Monetary union, price level convergence, and inflation: how close is Europe to the United States? Journal of Monetary Economics 54, 785-796.
• Rosenberg Ch. R., Tirpak M. (2008) Determinants of Foreign Currency Borrowing in the New Member States. IMF Working Paper, July.
• Salmon K. (2010) Boom to bust - reconstructing the Spanish economy', International Journal of Iberian Studies 23 (1), pp. 39-52.
• Samuelson P. A. (1964) Theoretical notes on trade problems. Review of Economics and Statistics 46, pp. 145-154.
• Schinasi G. J. (2004) Safeguarding financial stability, theory and practice. International Monetary Fund.
• Shirakawa M. (2009) Some Thoughts on Incentives at Micro- and Macro-level for Crisis Prevention. Remarks at the Eighth Bank for International Settlements Annual Conference. Basel, Switzerland. 26 June.
• Sławiński A. (2007) Znaczenie czynników ryzyka towarzyszących wchodzeniu Polski do ERM2 i do strefy euro. Referat na Kongres Ekonomistów Polskich. Warszawa, 29-30 listopada.
• Sławiński A. (2010) Joining the euro zone: From the perspective of emerging Europe countries. Folia Oeconomica, No. 239/2010.
• Stein J. C. (2010) Monetary Policy as Financial-Stability Regulation. Available online at http://www.economics.harvard.edu/faculty/stein/files/MonetaryPolicyAsRegulation-8-2010.pdf
• Sureda-Gomila A. (2011) Real Estate Boom and Crisis in Spain. In: Global Housing Markets: Crises, Policies, and Institutions (eds. A. Bardhan, R. Edelstein C. Kroll), pp. 157-172
• Taylor J. B. (1993) Discretion versus Policy Rules in Practice. Carnegie-Rochester Conference Series on Public Policy, no. 39, December, pp. 195-214.
• Taylor J. B. (2007) Housing and Monetary Policy. Speech at the Jackson Hole conference, September.
• Taylor J. B. (2010) Zrozumieć kryzys finansowy. Wydawnictwo Naukowe PWN, Warszawa.
• The Economist (2005) Special report: The global housing boom. In come the waves. June 16, the print edition. Available online at http://www.economist.com/node/4079027
• Topel R., Rosen S. (1988) Housing Investment in the United States. Journal of Political Economy 96, no. 4, pp. 718-740.
• Walsh C. (2009) Using Monetary Policy to Stabilize Economic Activity. Paper prepared for the symposium Financial Stability and Macroeconomic Policy, Jackson Hole, Wyoming. August.
• Weistroffer C. (2012) Macroprudential supervision: In search of an appropriate response to systemic risk. Deutsche Bank Research, 24 May.
• White W. (2012) Credit Crises and the Shortcomings of Traditional Policy Responses. Speech at the Second International Research Conference on 'Monetary Policy, Sovereign Debt and Financial Stability - The New Trilemma'. Mumbai, February 1-2.
• Wicksell K. (1898) Interest and prices. London, Macmillan, 1936. Translation of 1898 edition.
• Wilmarth A. E. (2002) The Transformation of the U.S. Financial Services Industry, 1975-2000: Competition, Consolidation and Increased Risks. University of Illinois Law Review, No. 2, May.
• Wyplosz C. (2006) European Monetary Union: the dark sides of a major success. Economic Policy, CEPR & CES & MSH, vol. 21(46), pp. 207-261