Table of Contents

Introduction

Arguments supporting the idea that monetary policy have significant effects on housing bubble.

Arguments against the idea that monetary policy have any direct effect on the housing bubble

Conclusion

References

Introduction

Monetary policy is one of the important policies which is used by the government of any country to manage the economic parameters (Caspi, 2015). This is an important tool to manage the amount of money supply in the economy and thus have effect price stability. These policies require changes in the short term borrowing rates in an economy which is generally the interest rates. The government and the monetary authority of the country can control the economic parameters like the exchange rate, unemployment rate, and Gross domestic through the changes in the interest rates.

One of the important monetary policy which has made history is the one in United States during the time of subprime crisis. The year 2008 was a remarkable year in global economic history as most of the countries of the world was facing a situation of slowdown or depression. The origin of such an economic situation was identified in the housing bubble. Such incident require deeper understanding of the related factors. Though the economists have identified that the housing bubble can be due to four main reasons: monetary and fiscal policies, inflow of capital from foreign, financial sector and bubble expansion.

The essay below would provide an account of the relationship between the monetary policy followed in United States at that time and how the contributed to the housing bubbles. We would critically evaluate the relation by evaluating the theories as established by the researchers in this area (Phiri, 2018). Also the final segment of this essay would make recommendations for the central banks of the countries to use monetary policies for various macroeconomic parameters.

Arguments supporting the idea that monetary policy have significant effects on housing bubble.

The incident in United States of low levels of interest rates and the rising prices of the real estate sector provide a real case example of how monetary policy can create housing bubbles. The prices of United States real estate has been stable during most of the period in history. It was from the year 1996 that the prices started to rise. From the period between 1997 and 2007, the prices rose by eleven percent. There were many factors which led to the housing bubble, but monetary policy during that period was also one of the important factor. Federal bank kept very low interest rates during that period which increased the amount of money circulating in the economy.

In one of the research, it indicates that the monetary policy of a country have direct effect on the prices in the housing sector (Dokko et al., 2011). The interest rate as established by the banks and financial institutions of a country impact the housing prices. The researchers indicate that the monetary policy of Federal Bank to control the macroeconomic environment was not appropriate. The nominal interest rate of the bank reached to a level of zero. These were aggressive policy measures which were previously never used in the history of United States. Federal bank used methods of quantitative easing which improved the availability of credit and the housing market.

Some of the eminent economists like White, Stokes, and Taylor show important link between low interest rates and high prices of real estate. They argue that the low interest level creates a situation of inflation, where people are ready to pay higher price for same goods. As the purchasing power of the people increases, they are ready to shell out more for the same piece of land. The low interes