Housing Wealth Effects Mechanism and the Monetary Policy Transmission in Turkey

It is commonly presumed that significant movements in wealth can often have wider economic impacts in consumer spending. This study first investigates the impact of housing wealth on aggregate consumer spending in the context of Turkey using a Vector Error Correction Method (VECM) under the structural break with quarterly data for the 1991Q1-2011Q1 period. Furthermore, to improve the robustness to instability in the long-run relationship between the variables, we also estimate an alternative econometric model based upon Carroll (2004). Both the VECM and Carroll's method suggest that permanent changes in housing wealth have considerable effects on aggregate consumption after 2001 while there is no significant financial wealth effect for the same period. Since our VECM results indicate that housing wealth does play a role in determining consumption, the next step is to find out whether there is a linkage between monetary policy and housing wealth and if so, how this relationship operates. For this purpose, we employ a kind of counterfactual experiment. Our results show that interest rate affects the housing market considerably and house prices play an important role in the monetary transmission.Doctor of Philosoph