The impact on consumption, house prices, and household wealth from monetary policy changes

Over the past two decades large fluctuations in asset prices have led to significant fluctuations in real household wealth in most industrialized countries.  These fluctuations in asset prices, which are predominantly reflected in rising (falling) house prices, have also coincided with increases (decreases) in aggregate household consumption. As a result, policymakers and economic researchers have been keen to identify and quantify the direct and indirect effects of changes in household wealth and house prices on aggregate consumption through changes in monetary policy settings. We employ a Vector Error Correction model (VEC) to identify and quantify (i) the direct impact of a rise (fall) in interest rates and (ii) the indirect impact on consumption resulting from a deterioration (improvement) in household wealth and house prices in the Australian housing market.