Inflation Targeting and Uncertainty in House and Rental Prices

Abstract

In 2001 Norway officially implemented a flexible inflation targeting monetary policy. This has coincided with escalated growth in house and rental prices. Studies have shown that, after implementing a flexible inflation target, countries tend to experience two characteristic trends compared to non-inflation targeting countries: house prices tend to increase at a greater rate, and inflation is lower and less volatile. As an addition to this line of research, this thesis investigates how flexible inflation targeting affects uncertainty, or volatility, in the housing market. This study contributes empirical evidence on how implementing flexible inflation targeting has affected volatility in house and rental prices in Norway, from 1979- 2015. Using both GARCH and EGARCH models, the results generally suggest that flexible inflation targeting is associated with a decrease in the volatility of house and rental prices. This conclusion is generally robust because it holds for most specifications for the conditional mean and variance, and for both the market for owning and renting residential property in Norway.