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Housing Variables and Monetary Policy - A Study of House Prices and Residential Investment and Their Importance for Monetary Policy

Housing constitutes a large amount of all economic activity and plays a significant role for the business cycle, and is of great importance for monetary policy. How central banks should approach different housing variables is contended. This thesis considers two variables, house prices and residential investment, and how they are of interest for monetary policy makers. House prices are difficult to include in inflation indices, and their developments are accordingly hard to respond to when conducting inflation targeting monetary policy. Furtermore, they are commonly associated with financial imbalances, but the exact role they play in this respect is a contended issue. House prices are found to be dealt with in varying ways among central banks, as there is a lack of consensus on the way to approach them. Residential investment is shown to play a significant role for the U.S. business cycle by Leamer (2007). Following his analysis, I consider its importance for recessions of 17 other OECD countries. I find that, while its role is less prominent than for the U.S., residential investment contains useful information about economic turmoil, and could potentially be used as a target variable for central banks in their pursuit to stabilize the business cycle