The effect of Housing in the Monetary Transmission Mechanism of Consumption in Euro Countries

Sammanfattning: This paper examines the indirect effect housing plays in the monetary transmission mechanism (MTM) of consumption. This is done by following the method of Giuliodori (2005) and estimating structural vector autoregressive models (SVAR) for 16 developed countries, from the first quarter of 1970 to the last quarter of 2018. For each country, two Impulse response functions of two different SVARs are compared. The first one in which house prices are treated endogenously and the second one in which house prices are treated exogenously. This second model is created to remove the indirect effect housing has on consumption, while keeping the direct effect. The paper finds that in countries with relatively larger mortgage markets the indirect effect of housing in the MTM of consumption is larger. The results are consistent over time, including the financial crisis of 2008 and in the euro regime.