Exchange Rate Pass-through to House Prices in Emerging Countries

This paper examines the role of exchange rates in explaining house prices in a sample of emerging market economies. We use a panel VAR methodology to understand the economic dynamics in response to exchange rate shocks. Impulse responses show that when the local currency depreciates unexpectedly, GDP is adversely affected, and consumer prices rise sharply in the following quarters. Monetary policy responds by raising interest rates. House prices also rise, but their dynamics are very different from those of consumer prices. The house price response peaks in the second quarter and then follows a slow downward process. In contrast, the response of consumer prices is larger on impact, but this impact lasts shorter than the response of house prices. In addition, the cross-country analysis documents significant pass-through heterogeneity across emerging markets. We also document size and sign asymmetries in the sense that deprecations and larger exchange rate shocks produce stronger pass through than appreciations and smaller shocks, respectively. Overall, the empirical analysis provides supportive evidence for the important role of exchange rates in explaining house prices in emerging economies.