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Monetary Policy and the Housing Bubble

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Social Finance

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Abstract

Economic conventions explain the Federal Reserve’s accommodative monetary policy from 2001 to 2004. This monetary policy caused the US yield curve to become upward sloping, in turn creating incentives for financial institutions to issue short-term debt to purchase long-term assets via credit, liquidity, and maturity transformation. Accommodative monetary policy boosted housing prices by reducing interest rates tied to real estate investment, inflating other asset prices, and reducing macroeconomic volatility. Three economic conventions motivated the Federal Reserve’s monetary policy, including fears of repeating Japan’s experience with deflation, inflation metric construction, and the Federal Open Market Committee’s disposition to asset price bubbles. Different economic conventions may have altered the Fed’s monetary policy, decreasing incentives for firms to engage in risky behavior and limiting the housing bubble. However, the Fed does not deserve monocausal blame for the crisis.

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Authors and Affiliations

  1. Mexico City, Mexico

    Neil Shenai

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Shenai, N. (2018). Monetary Policy and the Housing Bubble. In: Social Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-91346-9_3

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  • DOI: https://doi.org/10.1007/978-3-319-91346-9_3

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