T H E R O L E O F H O U S E P R I C E S I N T H E MONETA R Y T RA N SMISSION MECHANISM A CROSS E U ROPEAN COUNTRIES

This paper provides a discussion of the ‘housing market’ channels of the monetary transmission mechanism and offers some evidence of institutional differences in the European housing and mortgage markets. Using a number of Vector Autoregressive models, estimated individually for nine European countries over the pre-EMU period, we find that house prices are significantly affected by interest rate shocks. The relative role of these interest-rate-induced fluctuations in house prices for private consumption is then investigated. We show that house prices may enhance the effects of interest rate shocks on consumer spending in those economies where housing and mortgage markets are relatively more developed and competitive.