Assessing the Effects of Monetary Policy Shocks on Metropolitan Housing Markets in Canada: A Local Projection Analysis

Abstract

This paper examines the impact of monetary policy shocks on regional housing prices across Canada during the period of March 1999 to February 2020 by employing a two-step approach: the aggregate structural monetary policy shocks are obtained by structural VAR and the effects of monetary policy shocks on regional housing markets are estimated using a local projection analysis. The results suggest that contractionary monetary policy shocks are associated with a decrease in housing prices at the national level, and this is consistent with most of the existing literature. In addition, the results also provide some evidence that the magnitude and timing of responses vary among regional housing markets. Some cities are less responsive compared to the others. However, since the magnitude of response is either small or insignificant, it implies monetary policy shocks are far from being driving forces in the regional housing markets since they can only explain a very small fraction of regional housing volatilities, if any.