The Interrelation Between the Financial and Housing Markets: Implications for the Eurozone Stability

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José Pablo Abeal Vázquez
Universidade da Coruña
Spain
José Manuel Sánchez Santos
Universidade da Coruña
Spain
Vol 21 (2012): Crisis in the Eurozone, Articles
DOI: https://doi.org/10.15304/rge.21.Extra.430
Submitted: 11-10-2012 Accepted: 11-10-2012
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Abstract

The recent financial instability and its transmission to the productive economy, as wellas revealing the bidirectional nature of the relationship between financial and real variables, providesimportant questions about the ability of the European Central Bank to implement an effectivemonetary policy in an area as heterogeneous as the Eurozone. This finding is especially relevantwhen it comes to explaining the relationship between reference interest rates of monetarypolicy, the behavior of credit, the generation of price bubbles in the housing market and the evolutionof real economic activity. Thereby, the main objective of this paper is to explore into thenature of the relationship between financial and real estate markets and the factors that determinethe possibilities of the ECB to contribute to the stability of the Eurozone through the implementationof monetary policy. To do this we estimate a VAR model that allows to obtain evidenceabout the relationship between housing prices, interest rate, credit, inflation and GDP for asample of five countries that form part of the Eurozone (Spain, Ireland, Austria, France and Portugal).

Keywords:

Real estate market, Financial instability, Monetary union, Monetary policy, European Central Bank
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