Written assginment Unit 2 Principles of Finance

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Economics

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Nov 24, 2024

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1 Introduction In the wake of the global financial crisis, understanding the factors that led to the housing bubble of the early 2000s has become crucial. A working paper titled "Monetary Policy and the Housing Bubble" by Dokko et al. (2009) sheds light on the intricate relationship between U.S. monetary policy and the housing market bubble during that period. This essay aims to delve into the authors' position regarding the role of U.S. The authors of the working paper articulate a nuanced perspective regarding the influence of U.S. monetary policy on the housing market bubble during the early 2000s. Their position can be distilled into several key elements, each of which contributes to a comprehensive understanding of their viewpoint: 1. Low Rates Accompanied an Increase in Demand for Housing: A central argument made in the paper is the impact of historically low-interest rates set by the Federal Reserve. These low rates, in conjunction with the Federal Reserve's objective to stimulate economic growth following the dot-com bubble, significantly reduced borrowing costs. Consequently, there was a substantial surge in the demand for housing, making homeownership more accessible and enticing (Dokko et al., 2009). 2. Evaluation of Monetary Policy Effectiveness: The authors critically evaluate the effectiveness of monetary policy during this period by assessing its ability to achieve its objectives. Their analysis revolves around the Taylor Rule, which serves as a guideline for setting interest rates. However, the authors acknowledge that discrepancies in the choice of price index, among other factors, cast doubt on the precision of this evaluation (Dokko et al., 2009). 3. Evidence from the Timing of the Housing Boom: A pivotal piece of evidence presented in the paper is the timing of the housing boom, which closely aligns with the expansionary monetary policy of the time. The paper underscores the temporal correlation between the Federal Reserve's accommodative stance and the rapid ascent of housing prices. This temporal alignment strongly suggests that monetary policy played a pivotal role in fueling the housing bubble (Dokko et al., 2009).

2 4. Economic Simulation Models: To quantitatively analyze the relationship between monetary policy and the housing market, the authors employ economic simulation models, including the FRB/US model and Taylor Rules. These models provide numerical support for their assertion that monetary policy significantly influenced the housing bubble (Dokko et al., 2009). 5. Evidence from Other Research: The paper references a broader body of research studies and analyses to fortify its position regarding the impact of monetary policy on the housing market. This collection of external research aligns with the paper's arguments and strengthens the case that monetary policy indeed played a substantial role in shaping housing market developments (Dokko et al., 2009). 6. The Importance of Correct Data: Throughout the paper, there is a recurring emphasis on the significance of using accurate and appropriately aggregated data in economic analyses, especially in the context of the Taylor Rules. The authors assert that correct data is imperative for obtaining precise and trustworthy results in assessing the role of monetary policy (Dokko et al., 2009). Conclusion In conclusion, the research paper "Monetary Policy and the Housing Bubble" by Dokko et al. (2009) provides a comprehensive exploration of the complex relationship between U.S. monetary policy and the housing market bubble during the early 2000s. The authors argue that monetary policy, characterized by low-interest rates and its timing, played a pivotal role in fostering the housing bubble. They support their position with empirical evidence, economic simulation models, and references to other research. However, they also acknowledge the intricacies of policy evaluation and data accuracy, highlighting the need for a comprehensive understanding of the dynamics at play (Dokko et al., 2009). References

3 Dokko, J., Doyle, B., Kiley, T.M, Kim, J., Sherlund, S., Sim, J., & Van den Heuvel, S. (Dec. 22, 2009). Monetary Policy and the Housing Bubble. Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board. Retrieved from: https://www.federalreserve.gov/pubs/feds/2009/200949/200949pap.pdf

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