International Journal of Economy, Management and Social Sciences, 3(1) January 2014, Pages: 88-94

TI Journals

International Journal of Economy, Management and Social Sciences

ISSN
2306-7276

www.tijournals.com

The Study of Relationship between Credit Channel of Monetary

Policy and Real Estate Price in Iran
Ali Asghar Lotfi *
Assistants Professor at Islam-shahr branch of Islamic Azad University, Iran.
AR TIC LE INF O

AB STR AC T

Keywords:

In this article relationship between credits channel of monetary policy and price of real estate was
studied by using two vector auto-regression models during 1974-2008. In first model, long term
relationship between monetary policy and given loans to real estate section and in second model,
long-term and significant relationship between size of loans in real estate section and price of real
estate are studies. Based on results of first model existence of long term and significant relationship
between monetary policy and given loans to real estate section is confirmed. But estimation of
second model shows that there is no relationship between credit channel of monetary policy and
price of real estate and effects of monetary policy are not transferred through credit channel to real
estate section.

credit channel
monetary policy
vector auto-regression model (VAR)
price

JEL classification:
H81, E31, C22, E52

2014 Int. j. econ. manag. soc. sci. All rights reserved for TI Journals.

1.

Introduction

Real estate and construction industry is one of the important economical industries and its splendor and depression will have considerable
effects on economic growth or depression. Based on household budget results in urban parts of Iran about 33% of household costs include
cost of residence, water, electricity and gas. Therefore, changes in price of residence, influences directly entire economy of country and
welfare level of families. Regarding importance of real estate industry in economy and welfare of families, it is necessary to obtain enough
information about effects of monetary policies mechanism on price of residence. Based on this, present study tries to investigate influence
of credit channel monetary policies of central bank on price of residence. This article answers two questions:
Is there any relationship between credit channel of monetary policy and price of residence?
If so, how much is its effects?
For this purpose, this article is organized as below. After introduction, review of literature is presented and after that research method and
models will be introduced. Then models will be estimated for Iran's economy and after required tests, results will be analyzed. Final section
is conclusion.

2.

Review of literature and researches

Monetary policies are always recognized as important economic policy-making tools which significantly influences many economic
variables including prices. Changes in monetary policy influence short-term interests in monetary market which in turn influences
consumption decisions and investment of households and firms and as so, it will change total demand of economy. Effects of monetary
policy appear with time lag and transfer to real part of economy through different mechanisms. Credit channel is one of monetary policy
transfer mechanisms. It transfers monetary policy effects through influencing banks balance sheets (balance sheet channel) or banks loan
operations (loan channel) to real section of economy. Process of monetary policy influences through bank loan channel is as below:
imposing contractive monetary policy decreases deposits and as a result some applicants for receiving credit were eliminated from credit
cycle and consequently investment and real production will decrease (Krylova, 2002). Regarding balance sheet changes in net worth of
debtors influences loan condition based on mortgage. If fluctuations of net worth caused by price fluctuations of security properties like real
estate is explained, in this case, mortgage loans will be exposed to balance sheet mechanism. In fact, mortgage loans are part of security
loans which are severely influenced by price of these properties. This can explain behavior of banks in investing for increasing their
portfolio in real estate in periods of increasing prices. In fact, increasing price of properties increases net worth of households and firms'
balance sheet. Extra loans can influence purchase of goods and services and economic activities (Goddhart and Hofman, 2001).
Iacoviello (2005) has studied role of real estate as a security in transfer mechanism. Because real estate wealth is an important variable in
balance sheet it determines limitations of taking loans by economic agents. More securities reduce information asymmetry and loan giving
condition. Therefore, there is a direct relationship between increasing loan and price of real estate. In addition, Kiotaki and Moore (1997)
showed that real estate property acts as a catalyst which strengths monetary policy and creates a price channel for real estate.
* Corresponding author.
Email address: lotfi@iiau.ac.ir

The Study of Relationship between Credit Channel of Monetary Policy and Real Estate Price in Iran

89

Internati onal Jour nal of Economy, Mana ge ment and Social Sciences , 3(1) January 2014

In below diagram the relationship between money and real estate price is shown. Money is directly related to price of houses and wealth is
related through money demand and asset inflation channel to houses. Credit channel shows that growth in price of real estate influence
loan-taking capability of families which it is in turn changes loan and money supply.

Diagram1: relationship between money and real estate

An arrow which relates price of real estate to loan in a two-way form, shows that higher price of real estate and loan, influence each other:
i.e. by increasing price of real estate, capacity for loan taking in families increases and at the same time, increasing of loan supply causes
more increasing in house price.
The role of monetary transfer credit channel in real estate market is like its role in other economic parts.It is expected that both credit
channels i.e. balance sheet channel and loan giving channel have more effective role in real estate section. There are studies in this regard
that we refer to some of them:
In Lastrapes article (2002) dynamic effects of money supply shocks on price of real estate are measured and analyzed. These effects have
two-fold importance: first, understand that how money influences real section of economy (at least in short term) and understanding
economic behavior in real estate market. In this research time series data of US real estate market and large scale economy using Vector
auto-regression (VAR) was applied to estimate dynamic reaction of price and real estate sale on unexpected money supply shocks. Results
of this study show that monetary policy shocks have important dynamic effects on real estate market variables and total production, prices
and interest rate. Based on this model monetary shocks influences cost of household residence by influencing real interest rate.
A study about credit channel was conducted be Leo De Hann (2001) in Netherlands. This study is an empirical analysis of banks' role in
transfer process of monetary policy in Netherlands. Balance sheets of Netherlands banks during 1990-1997 were used in this study. Main
focus of research in on loan giving or in other words reactions of supplying loan and loansto monetary policy shocks. Results of this study
showed that loan giving channel in Netherlands is active for loans without public guarantee but in cases of loans with public guarantee
contractive monetary policy has no negative effect, because banks show different behavior against those loans with public guarantee.
According to this study it is clear that negative effects of contractive monetary policy on small banks are larger than large banks. It seems in
this study that loan giving to families is not influenced by monetary policy as loan giving to firms. About effect of contractive monetary
policy on deposits size, results show that size of deposits especially long term deposits react positively to contractive monetary policies.
This unexpected result is caused by performance of monetary policy in Netherland in time of implementation.
Valderama (2002) has analyzed credit channel view from transfer mechanisms of monetary policy in Australia. In this study effect of
monetary policy on performance of firms was studied because of monetary policy effects on banks through credit channel mechanism. Data
were gathered from balance sheet of Australian firms and loans given to firms during 1994-1999. Results of this study indicates credit
channel in Australia and this causes implementing strict monetary policy increases finance limitations of firms because in increases finance
costs from foreign resources (especially banks which face decrease in deposits because of credit channel).
In study of Bjornald and Jackobson (2008) amount effects of real estate price on transfer mechanism of monetary policy was studied using
VAR model. Results show that following contractive monetary policy shocks price of real estate decreases. In addition, rate of interest
increases systematically in response to shocks that increase price of real estates.
Sharifi Ranani et.al (2009) studied monetary transfer mechanisms using structural VAR model and data for 1989-2008 in Iran. Their main
purpose is investigating exchange rate, credit and other properties channels (real estate price indicator) in Iran. Results show that when
debts of banks to central bank is used as a policy variable, in short-term and middle-term, real estate price channel was the most effective
channel for monetary transfer but in long term none of these channels have role in transferring money.
Beheshti and Znoozi (2010) studied real estate market in monetary transfer mechanism using SVAR model and data for 1988-2006. Their
result show that expanding monetary policy shock through liquidity has significant and sustainable effect on price of real estate; therefore,
price of real estate is recognized as an important medium for transferring monetary shocks because of fluctuations in gross domestic
production.

Ali Asghar Lotfi

Int ernational Journal of Economy, Mana ge ment and Soci al Sci ences , 3(1) January 2014

3.

Methodology

Two VAR models had used in this study in order to investigate relationship between monetary policy credit channel and price of real estate.
First model will study long term relationship between monetary policy and given loansto real estate section. If there was a long term and
significant relationship between monetary policy and given facilities, we will use second VAR model which studies long term and
significant relationship between given loansto real estate section and price of houses. By estimating these two models the relationship
between monetary policy credit channel and price will become clear.
First VAR model

First VAR model studies long term relationship between monetary policy index and given loansto real estate section. Because monetary
policy tools like open market operation, interest rate or legal deposit rate have not enough efficiency in Iran (Lotfi and Taqavi, 2006) and
central bank directly controls liquidity or in other words, imposes monetary policy changes in size of liquidity are considered as monetary
policy index in this study. Its increase is the sign of expanding monetary policy and its decrease shows contractive monetary policy. Based
on this, VAR model has two equations:

(1)

(2)
In these equations M2 is real variable of liquidity size or monetary policy index and HLOAN is given loans variable in model. Both these
variables are internal. GDP variable and constants 1 and 2 are external variables.
Second VAR model

Second VAR model studies long term relationship between given loansto real estate section and price index. In this model real amounts of
given loansto real estate section and price index are used as internal variables and consumer price index and trend as external variables.
Accordingly, VAR model is as follows:
(3)
(4)
In these equations, HPI is real estate price index and HLOAN is given loansvariable. Both variables are internal. CPI (consumer price
index) and trend variable (T) and constants 1 and 2 are external variables in this model.

4.

Model estimation

In order to estimate VAR models it is necessary to study stationary of variables included in model and existence of cointegration vectors.
Regarding tables 1 and 2 it is seen that all variables in critical level 1% for model 1 and critical level %5 for model 2 are quadratic
cointegrated or I(2). Therefore, all variables are permanent with two differentiating.
Table 1: Dickey-Fuller test for studying stationary of model 1 variables in %1 critical level
Number of lags

Without lag

One lag
(first order difference)

Two lags
(second order difference)

Variable

Critical value

Dicky-Fuler statistic

Result

M2

-2.95

4.52

Non stationary

HLOAN

-2.95

0.91

Non stationary

GDP

-2.96

3.11

Non stationary

M2

-2.95

-0.48

Non stationary

HLOAN

-2.95

-1.7

Non stationary

GDP

-2.954

-2.957

stationary

M2

-2.96

-5.95

stationary

HLOAN

-2.96

-6.04

stationary

GDP

-2.95

-7.1

stationary

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Internati onal Jour nal of Economy, Mana ge ment and Social Sciences , 3(1) January 2014

Table 2: Dickey-Fuller test for studying stationary of model 2 variables in %5 critical level
Number of lags

Variable

Critical value

HPI

-2.95

2.2

Non stationary

HLOAN

-2.95

0.91

Non stationary

CPI

-2.95

2.81

Non stationary

HPI

-2.95

3.2

Non stationary

HLOAN

-2.95

-1.7

Non stationary

CPI

-2.96

2.27

stationary

HPI

-2.95

-3.78

stationary

HLOAN

-2.96

-6.04

stationary

CPI

-2.96

-5.6

stationary

Without lag

One lag
(first order difference)

Two lags
(second order difference)

Dicky-Fuler statistic

Result

According to table 3 and 4, existence of one cointegration vector is confirmed for both models. Furthermore the number of internal
variables in each model is one. So we can conclude that there is a long term equilibrium relationship between models' variables and we can
estimate both models without differentiating.

Table 3: Results of cointegration test for model 1

Critical level %5

5.41
3.76

4,07
3.76

Test statistics

H1

H0

r =1
r=2

r =0
r1

r =1
r=2

r =0
r1

H1

H0

16.93

r =1

r =0

0.039

r=2

r1

r =1
r=2

r =0
r1

trace test
21.17
2,82
Max-Eigen test
18,35
2,82

Table 4: Results of cointegration test for model 2

Critical level %5

Test statistics

trace test
15.49
3.84

Max-Eigen test
14.26
3.84

16.89
0.039

4-1- Estimation first VAR model

Result of estimating first VAR model is shown in below equations:

(-1.33)

(3.31)

(-0.92)

(2.06)
(-1.74)
(0/81)
R2 = 0.95
In above equation liquidity size variable is independent variable and its effect on bank loansis estimated. Values in parentheses show t-test
results that if they were less than 2, it means that significance of these coefficients is in %95 confidence level. Therefore, regarding
obtained results, only variables HLOANt-1 and M2t-1 are statistically significant which indicates that amount of loans in present year is
influenced by loans amount and liquidity size in previous year. Determination factor of model (R 2) is 0.95 and this shows that %95 of
changes in dependent variable of model is explained by independent variable. Therefore, results of this estimation show that expanding
monetary policy increases given loans to real estate section and we can say that monetary policy credit channel is present in given loans to
real estate section. But in second VAR model liquidity size variable in year t is dependent variable in model and liquidity size and given
loansto real estate section with one year and two years lags and GDP are external variables. Results of this models estimation is:

Ali Asghar Lotfi

Int ernational Journal of Economy, Mana ge ment and Soci al Sci ences , 3(1) January 2014

(-3.24)

(3.97)

(-2.02)

(0.324)

(0.655)

(2.44)

R2 = 0.97
In above model numbers in the parenthesis show t-statistics value. This model shows that liquidity size in present year is influenced by
liquidity size of previous year and two years before and GDP in present year. This model also shows that given loans to real estate section
has not significant effect on liquidity size. Determination factor of this equation is 0.97 and indicates that %97 of dependent variable
changes is explained by this model.
4-2- Estimating second VAR model

Result of second VAR model is shown as following equations:

(-0.32)

(5.92)

(-1.23)

(0.06)

(0.6)

(3.66)

(-0.95)

R 2 = 0.999
In above equation real estate loans variable is independent variable of model and its effect was estimated on price. Numbers in parentheses
show t-statistic which if it is lower than 2 it means that significance of related coefficient is rejected in %95 confidence level or in
%5critical level. Therefore, regarding obtained results only variables HPIt-1 and CPIt are statistically significant and indicate that real estate
price index in present year is influenced by its price index in previous year and consumer price index. But based on model it is estimated
that amount of given loans to real estate section has not significant effect on price index. It is clear that (R2) model is 0.999 and shows that
more than %99 of changes in dependent model is explained by independent variables. Therefore, results of this estimation show that given
loans to real estate section has no effect on price index. Thus, we can state that there is no relationship between monetary policy credit
channel and price of houses. In other words, although monetary policies of central bank have significant effect on given loans in real estate
section but changes in size of given loans caused by monetary police have no influence on price index. Therefore, government and central
bank will not be able to significantly influence on prices by imposing contractive monetary policies and prevent increasing prices. Result of
second equation estimation is as below:

(4.16)

(4.86)

(-1.91)

(0.379)

(1.02)

(-3.18)

(1.05)

R2 = 0.97
In above model, numbers in parenthesis show t-statistic. Determination factor related to this equation is 0.97 and indicates that %97 of
changes in dependent variable is explained by this model. Regarding above equation, it is clear that amount of loans in present year is
influenced by real estate loans in previous year and consumer price index. Above model shows that real estate price index has no significant
effect on increasing or decreasing bank facilities.
4-3- Testing stability of estimated models

Estimated VAR equations are stable when certain root of model is less than one and in other words, it is placed in unit circle. Following
tables show that certain roots of both models are less than one and both models are stable.

Table 4: stability test for model 1

table 4: stability test for model 2

The Study of Relationship between Credit Channel of Monetary Policy and Real Estate Price in Iran

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Internati onal Jour nal of Economy, Mana ge ment and Social Sciences , 3(1) January 2014

4-4- Serial auto-correlation test in VAR model

In order to study serial auto-correlation among error components in estimated VAR model LM test is used that based on results of this test
null hypothesis showing lack of serial auto-correlation among between error components in both VAR models is confirmed. Result of this
test is presented in following tables.
Table 5: auto-correlation test for model 1

table 5: auto-correlation test for model 2

4-5- Analyzing strike response functions

In this section, in diagram 2, effect of liquidity on bank loans is shown using response functions which indicate that effect of one shock by
one standard deviation show increase in real estate loans and this increase is at peak in fourth year and then decreases. In diagram 3 effect
of bank loans on price effect using response function is shown. As it is seen from following figure effect of shock by one standard deviation
in given loans slightly increases price of houses which this increase reaches to peak in fifth year and then decreases.

Diagram 2: analysis of response effect in model 1

Ali Asghar Lotfi

Int ernational Journal of Economy, Mana ge ment and Soci al Sci ences , 3(1) January 2014

diagram 3: analysis of response in model 3

Source: research findings

5.

Conclusion

In this research two VAR models were used to study relationship between monetary policy credit and price of houses. In first model,
existence of long term relationship between monetary policy and given loans and in second model, existence of long term and significant
relationship between loans given to real estate and price. Based on estimation of first model, relationship between long term monetary
policy and given loans to real estate section is confirmed. But in second model existence of long term significant relationship between real
estate and price of houses was not confirmed. Therefore, regarding results of VAR models estimation we can conclude that in long term
there is no significant relationship between monetary policy credit channel and regarding lack of significant relationship between monetary
policy credit channel and price of house we cannot comment about degree of relationship. Therefore, we can conclude that there is no
relationship between monetary policy credit channel and price and effect of monetary policy is not transferred through credit channel
mechanism.

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