MONETARY, MACROPRUDENTIAL POLICIES AND HOUSING CYCLES: EXPLORING THE NEXUS IN TURKEY

Year 2015, Volume: 37 Issue: 2, 233 - 260, 14.03.2016

Ali Doğruel , Umurcan Polat

https://doi.org/10.14780/iibd.00004

Abstract

Given the pro-cyclicality of the financial cycles on the business cycles, it is of
importance to analyze whether the use of the traditional monetary policy instruments along with the prudential responsibilities result in the prevention of unsustainable financial cycles e.g., housing cycles. Still, there is not enough empirical evidence regarding the exploration of the nexus between housing variables and monetary – macroprudential policy rules. Observing the developments in housing market in Turkey, that is, the simultaneous increase in both house prices and residential investments in the last decade, the nexus between housing market and macro economy deserves a further investigation. 

Accordingly, a new Keynesian DSGE model is estimated with Turkish data
for a period 2010-2014 using Bayesian techniques in this study. Results reveal that arguments for a monetary policy regime that produces aggregate price stability will, as a byproduct, tend to promote stability of housing markets don’t fully hold in the estimation. It can also be stated that the monetary policy rules with existing prudential policy instruments may not result in prevention of further housing “bubbles”. The variance-shock decomposition analyses show that demand and supply shocks dramatically determine the cycles of the real housing prices and residential investment whereas the monetary policy shocks and shocks in central bank’s inflation target do not explain the volatility of the housing variables.

Keywords

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