LAUSR

Existing research demonstrates that housing, particularly residential investment, plays an important role in the transmission of monetary policy shocks to the overall economy. With this in mind, this paper investigates the relationship between monetary policy and housing market activity using a relatively new method for identifying monetary shocks. More specifically, a monetary policy shock is identified by explicitly imposing sign restrictions on impulse response vectors. The extra information from sign restrictions is important for new insights regarding the transmission of monetary policy to the housing sector – notably, the results indicate that residential investment is less sensitive to a contractionary shock than standard estimates with recursive restrictions. Given that the response of the housing sector using sign restrictions is smaller than other work using standard identification methods, the work indicates that further research is needed to examine whether other sectors of the economy may be less sensitive to monetary policy than previously thought.