An Econometric Approach to Assess the Impact of Negative Interest Rate Policy (NIRP) on Real Estate Price Inflation in the Eurozone

Abstract

Contemporary economists argue that negative interest rate as an unconventional monetary policy helps stimulate economic growth. The European Central Bank (ECB) entered Negative Interest Rate Policy (NIRP) territory in June 2014, when it lowered its deposit rates to below zero levels, making it the first major central bank to adopt such policy. In contrast, NIRP can have negative effects on certain economic sectors, such as the property and housing. This paper highlights the effects of negative policy rates on the real estate price inflation inside the Eurozone. The relationship between house price index, negative policy rates, government deficit, unemployment rate, and nominal unit labor cost is addressed and analyzed. Two main hypotheses were adopted i.e., to determine the direct relationship between the Deposit Interest Rate and the House Price Index, and the indirect relationship between the Deposit Interest Rate and the House Price. Furthermore, an econometric model is utilized to sort out the impact of NIRP on the real-estate price inflation in the Eurozone. The outcome of the model shows a strong relationship between negative policy rates and house price index, with government deficit, unemployment rate, and nominal unit labor cost acting as confounding variables.