Monetary policy transmission over house price cycles

Abstract

This paper investigates state-dependent monetary policy transmission over house price cycles by examining consumption indicators and monetary policy measures in Korea. Monetary policy shocks are identified by adopting a recursiveness restriction in a structural vector autoregression or by orthogonalizing changes in policy rates with respect to a set of economic forecasts that policymakers refer to in their policy decision process. House price cycles are generated by transforming the cyclical components of real house price indicators with a logistic function. Dynamic responses of household consumption variables to the monetary policy shocks are measured from a smooth transition local projection procedure. Consumption indicators decrease significantly in response to contractionary monetary policy shocks in a linear model that does not differentiate between cycles, and these are mainly driven by those in the low house price periods when considering asymmetric transmission across the house price cycles.