Interest Rate Elasticity of Residential Housing Prices - IMF.pdf

WP/08/247 Interest Rate Elasticity of Residential Housing Prices Plamen Iossifov, Martin Čihák, and Amar Shanghavi © 2008 International Monetary Fund WP/08/247 IMF Working Paper African Department Interest Rate Elasticity of Residential Housing Prices Prepared by Plamen Iossifov, Martin Čihák, and Amar Shanghavi1 Authorized for distribution by Cyrille Briançon October 2008 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the authors and are published to elicit comments and to further debate. We examine the interest rate elasticity of housing prices, advancing the empirical literature in two directions. First, we take a commonly used cross-country panel dataset and evaluate the housing price equation using a consistent estimator in the presence of endogenous explanatory variables and a lagged dependent variable. Second, we carry-out a novel analysis of determinants of residential housing prices in a cross-section of countries. Our results show that the short-term interest rate, and hence monetary policy, has a sizable impact on residential housing prices. JEL Classification Numbers: R21, R31 Keywords: Housing prices Authors’ E-Mail Addresses: piossifov@; mcihak@ 1 Amar Shanghavi, who worked on the paper while at the IMF, is presently a