Would a ‘Modest Policy Intervention’ Have Prevented the U.S. Housing Bubble?

Benati, Luca (April 2016). Would a ‘Modest Policy Intervention’ Have Prevented the U.S. Housing Bubble? (Discussion Papers 16-09). Bern: Department of Economics

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A ‘modest policy intervention’ in which the Federal Funds rate had reacted, weakly but systematically, to the ratio between house prices and rents would have prevented the building up of the housing bubble which pre-dated the Great Recession, at a small cost in terms of real activity. Monetary policy shocks, which I identify by combining zero and sign restrictions, cause strongly statistically significant decreases in real house prices, housing starts, hours
worked in construction, and loans to the real estate sector, and a statistically significant temporary increase in the real rent.

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