Written Assignment Unit 2

The University of the People

BUS 2203-01 - AY2024-T3

Jason Ellis (Instructor)

2-4-24
From the study of monetary policies in the housing bubbles of previous decades, It is interesting

to explore what the authors of the study who examined monetary policy and the bubble in the

real estate market thought about US monetary policy and the housing boom at that time. The

author's paper was insightful on monetary policy and the boom in home ownership that

impacted most of society in the early 2000s.

From the position of the author the United States experienced an increase In the housing

market after the year 2000 In the form of residential Investments. The author states “The

strength in housing demand created a substantial run-up—indeed, a large bubble—in house

prices:” (Kiley, 2009) From my perspective, according to Kiley, there is little evidence that loose

monetary policy is superior to tight monetary policy. Research shows that “The primary goal of

a loose monetary policy is to stimulate economic growth, increase employment, and combat

economic downturns, such as recessions or periods of low economic activity” (tutor2u, 2023)

The primary goal of a tight monetary policy is “to control inflation and stabilize the economy by

slowing down excessive economic growth and preventing the economy from overheating”.

(tutor2u, 2023) In contrast to what the author suggested when he said “We provide evidence

that monetary policy was well aligned with the goals of policymakers and was not the primary

contributing factor to the extraordinary strength in housing markets.” (Kiley, 2009)

Many factors affect low rates accompanied increase in demand for housing, “Some of the

factors that will influence housing demand include lower interest rates or borrowing costs. When

interest rates are low, people are generally willing to take on more debt because they can afford

relatively more debt for the same monthly outlay” (Mansa, n.d.) For example, if an individual's

interest rate is 2%, they will be able to borrow more for the same monthly payment than if they

were paying 10% interest.

A contributing factor to the housing boom is the rise of cheap and available credit, which

increases purchasing power and makes it easier to borrow money so that home ownership

becomes more affordable. As a result of monetary policy, the timing of the housing boom

appears to have been influenced By low-interest rates.

Next, we will examine policy assessment and outcomes, “During the 2003–06 time frame, the

setting of monetary policy appeared to follow the broad contours that would be expected given

conventional macroeconomic views:” (Kiley, 2009) The article gives three considerations for

desired outcome for policy assessments “policy must be forward-looking, policy should be

evaluated based on how effectively it promotes its objectives, and the benchmark for

effectiveness should be what could reasonably have been expected given what was known at

the time” (Kiley, 2009)

Lastly “The Taylor Rule is a formula tying a central bank's policy rate to inflation and economic

growth.” (Kelly, n.d.) But from studying the article this had little impact because the article states

“Besides the U.S., several other countries had loose monetary policy relative to a Taylor Rule,

albeit to varying degrees. At the same time, some but not all)foreign economies experienced

housing booms, again to varying degrees ” (Kiley, 2009) Global asset prices rose as housing

prices rose in many countries. People with more wealth purchased more assets.

In conclusion, the article gives a lot of great explanations on monetary policies in the housing

bubble between the years of 2003 to 2006 and the impact it had on housing development. The

article explores the housing boom and the author's opinion of Interest rates and housing

activities related to the mortgage market.

 References

Kelly, R. (n.d.). Taylor Rule Definition - Federal Reserve. Investopedia. Retrieved

February 10, 2024, from https://www.investopedia.com/terms/t/taylorsrule.asp

Kiley, M. (2009, December 22). Monetary Policy and the Housing Bubble. Board of

Governors of the Federal Reserve System. Retrieved February 10, 2024, from

http://www.federalreserve.gov/pubs/feds/2009/200949/200949pap.pdf

Mansa, J. (n.d.). Housing Market Supply and Demand. Investopedia. Retrieved February

10, 2024, from https://www.investopedia.com/ask/answers/040215/how-does-law-

supply-and-demand-affect-housing-market.asp

tutor2u. (2023, October 14). What is the difference between tight and loose monetary

policy? Tutor2u. Retrieved February 10, 2024, from

https://www.tutor2u.net/economics/reference/what-is-the-difference-between-tight-and-

loose-monetary-policy