MONETARY-POLICY AND HOUSE PRICE VOLATILITY IN WESTERN-EUROPE

This article examines whether the relationship between house price volatility and monetary policy in Western Europe supports the introduction of European single currency. House prices in Western Europe are examined over the period 1985-93 and a number of preliminary conclusions are drawn. Housing policy in Spain, Finland and the UK are examined in some detail to establish whether internal adjustments can be made to make housing markets less volatile. The recessions in Finland and the UK are further analysed to establish whether 'debt deflations' occurred in these countries. It is concluded that debt deflation did plausibly occur and that currency devaluation was justified to help to stabilise asset prices. The article concludes that monetary union would have severe consequences for countries with volatile housing markets.