Common Business and Housing Market Cycles in the Euro Area from a Multivariate Decomposition

33 Pages Posted: 3 Jun 2010

See all articles by Laurent Ferrara

Laurent Ferrara

Banque de France

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute; Aarhus University - CREATES

Date Written: January 1, 2010

Abstract

The 2007 sub-prime crisis in the United States, prolonged by a severe economic recession spread over many countries around the world, has led many economic researchers to focus on the recent fluctuations in housing prices and their relationships with macroeconomics and monetary policies. The existence of common housing cycles among the countries of the euro zone could lead the European Central Bank to integrate more specifically the evolution of such asset prices in its assessment. In this paper, we implement a multivariate unobserved component model on housing market variables in order to assess the common euro area housing cycle and to evaluate its relationship with the economic cycle. Among the general class of multivariate unobserved component models, we implement the band-pass filter based on the trend plus cycle decomposition model and we allow the existence of two cycles of different periods. The dataset consists of gross domestic product and real house prices series for four main euro area countries (Germany, France, Italy and Spain). Empirical results show a strong relationship for business cycles in France, Italy and Spain. Moreover, French and Spanish house prices cycles appear to be strongly related, while the German one possesses its own dynamics. Finally, we find that GDP and house prices cycles are related in the medium-term for fluctuations between 4 and 8 years, while the housing market contributes to the long-term economic growth only in Spain and Germany.

Keywords: House Prices, Business Cycles, Euro Area, Unobserved Components Model

JEL Classification: C13, C32, E32, R21

Suggested Citation

Ferrara, Laurent and Koopman, Siem Jan, Common Business and Housing Market Cycles in the Euro Area from a Multivariate Decomposition (January 1, 2010). Banque de France Working Paper No. 275, Available at SSRN: https://ssrn.com/abstract=1619273 or http://dx.doi.org/10.2139/ssrn.1619273

Laurent Ferrara (Contact Author)

Banque de France ( email )

Paris
France

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

HOME PAGE: http://personal.vu.nl/s.j.koopman

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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