CROSS-COUNTRY EVIDENCE ON THE CAUSAL RELATIONSHIP BETWEEN POLICY UNCERTAINTY AND HOUSE PRICES

This paper empirically examines the causal linkages between policy uncertainty and house prices in a panel of seven advanced countries including Canada, France, Germany, Italy, Spain, the UK and the US. We implement a bootstrap panel causality test on quarterly data from 2001Q1 to 2013Q1, which allows us to circumvent the data limitation as observations are pooled across countries. Empirical results provide evidence of a bi-directional causality between real house prices and policy uncertainty, suggesting that high uncertainty related to future economic fundamentals and policies increases house price volatility, which in turn may amplify financial and business cycles. This finding is consistent with individual results for France and Spain, while contrasting with the unidirectional causality reported in the remaining countries. Particularly, support for a unidirectional causality running from policy uncertainty to real house prices is found in Canada, Germany and Italy, while a unidirectional causality running from real house prices to policy uncertainty prevails in the UK and the US.