Housing prices and private credit in the Eurozone: A single monetary policy with dissonant transmission mechanisms

Following the establishment of the Economic and Monetary Union (EMU), European countries experienced a decline in interest rates that significantly affected credit and housing prices. Under the common monetary policy, housing prices increased by more than inflation, yet with uneven effects across countries. In tandem, private credit accumulated much faster than economic growth, suggesting the existence of an interaction between property prices and private credit. The literature has shown housing assuming a central role in the transmission mechanism of monetary policy both through wealth effects on consumption and the credit channel, by providing the necessary collateral to credit-constrained households. In the Eurozone, different legislation, institutional features, and even cultures define dissimilar housing markets, and a single monetary policy, through equally low-interest rates, may have contributed to accentuating divergences by stimulating differently the transmission channels of monetary policy, compromising EMU financial stability.

This paper studies the role of housing prices and private credit in the transmission mechanism of the European monetary policy focusing on a panel of 12 Eurozone countries between 2000Q1 and 2017Q4. Considering the heterogeneity that characterized European housing markets, this analysis distinguishes two groups of countries defined by their average housing inflation up to the financial crisis, besides isolating the period that follows 2008 to capture the impact of the economic turmoil. Using quarterly data retrived from the Organization for Economic Co-Operation and Development (OECD) database on panel vector auto-regression models and impulse response analysis, the estimations indicate broad money having an asymmetric impact across the Eurozone, being better adjusted to member countries with lower growth rates in housing prices. Private credit responds to shocks in all variables, while these variables are relatively invariant to shocks in credit. For the whole period, housing prices are more effective than credit as a monetary policy channel suggesting wealth effects from housing on output fluctuations. The single monetary policy has a different transmission mechanism across Eurozone countries, and this mechanism changed from 2008 onwards, moving from housing to credit, especially for countries that experienced high inflation in their housing prices.

Keywords: monetary policy; housing prices; private credit; Eurozone

JEL codes: C33; E44; E52; R30