Research Discussion Papers, Bank of Finland
No 12/1998:
House Prices and Inflation: A Cointegration Analysis for Finland and Sweden
Bharat Barot and Kari Takala ()
Abstract: Given the emphasis on price stability in monetary policy,
the concern caused by recent rapid increases in housing prices are
understandable. It is suspected that such rises may provide early
indication of mounting inflationary pressure. The purpose of this paper is
to formulate and estimate an error-correction system model for housing
prices and inflation for forecasting purposes. By using the estimated
cointegrating vector, we also get an estimate of the equilibrium level for
house prices that might be helpful in analysing the current situation in
the housing market and the stance for monetary policy. Housing prices
typically exhibit large cycles, and they are thus predictable to some
extent. Volatility is caused by the fact that the supply of houses does not
react perfectly to changes in housing demand. However, housing prices and
inflation tend to have similar growth rates over the long run. In other
words, houses provide a good inflation shelter, but in the long run, the
real return to is equal to the explicit or implicit rental income derived
from the owning of houses. The estimation results also show that the
changes in the general price level are transmitted into house prices rather
quickly, but inflation is surprisingly insensitive to housing prices. The
equilibrium relationship between housing prices and consumer prices is also
affected in the short run by variables such as interest rates, wage rates
and the unemployment rate.
Keywords: house prices; inflation; cointegration; (follow links to similar papers)
43 pages, June 18, 1998
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