Monetary Policy and Housing Markets: Evidence on Leaning against the Wind in Romania

There is a long debate among academics and professionals on the effectiveness of a leaning against the wind policy in which Central Banks raise interest rates more than it would be necessary to ensure price stability by looking into residential real estate prices when setting their monetary policy. Though the use of a Bayesian Vector Auto Regressive (BVAR) model, this paper aims at contributing with answers related to this paradigm by studying the impact of monetary policy on house prices in Romania and analyzing the potential opportunity cost that such a decision may have on economic welfare in the short run. Using both a Cholesky and a sign restriction identification, the results indicate that a monetary policy shock aimed at raising the interest rate leads to a decrease in house price dynamics. It was also noticed that accelerating mortgage lending leads to an increase in house price growth rates. Output dynamics react negatively to the same monetary policy shock, but with a smaller magnitude compared to the change in house prices. The results could justify Central Banks’ consideration of house prices when setting up interest rates, but they must be analyzed in conjunction with the potential negative impact on economic growth.