FFR Level in the Period 2000-2007 and the Emergence of the Asset Price Bubble on the US Real Estate Market
FFR Level in the Period 2000-2007 and the Emergence of the Asset Price Bubble on the US Real Estate Market

Summary/Abstract: This article aims at investigating the impact of the level of the Fed funds rate in the United States in the period 2000-2007 on the emergence of the asset price bubble on the US real estate market, burst of which triggered the financial crisis in the US and globally. Rather than constructing a single theoretical or empirical model of this potential influence, a more eclectic approach is taken. The argument is structured around three fundamental questions (1) whether the Fed funds rate had been low compared to benchmarks in the given period; (2) whether low short-term rate itself had been able inflate a real estate bubble; (3) whether alternative explanations of the bubble causes were sufficient. For each of the issues a number of qualitative explanations and quantitative models is provided and analysed. Based on the gathered data, models, and arguments, the paper concludes that the influence of the Fed funds rate on the bubble’s emergence is not to be underestimated. This conclusion should be kept in mind in the context of future directions for monetary policy in the US and globally, as the extremely low interest rates applied by central banks to date might be inflating the next bubble.

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