Working Paper Series,
Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance

Abstract: The main objective is to answer the question of what role does the housing market play for the transmission mechanism and especially is the impact constant over time. The research question also includes analyzing the importance of the housing market for the transmission mechanism. We estimate an eight-variable structural vector autoregression (SVAR) model of the Swedish economy over the period 1993 and 2018, covering both the internet bubble in 2000 and the financial crises in 2008. The results indicate that interest rates have both a direct effect on housing prices and an indirect impact through the bank lending channel. Overtime has the traditional interest rate channel importance has been stable. On the other hand, the role of the bank lending channel has increased over time. Household debt has increased substantially in Sweden and elsewhere. That means that the interest rate sensitivity in society has increased. Based on the results, it is possible to evaluate and forecast potential house price effects (both direct and indirect) when the interest rate changes.

Keywords: Monetary policy; transmission mechanism; bank lending; house prices; structured VAR; Granger causality

JEL-codes: C54; E52; E63; R31; R32

25 pages, April 14, 2020

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