Recent events have underscored the importance of asset price booms and busts as sources of financial instability. Unsustainable property price appreciation figured prominently in the 2007–2009 financial crisis, in the 1997–1998 Asian financial crisis, and in Japan’s property market collapse in the early 1990s. Monetary policy has come under intense scrutiny as a possible factor contributing to the escalation in real estate prices, with some blaming the US Federal Reserve’s low interest rate policy for creating a bubble in the US housing market. These tumultuous experiences have generated a great deal of interest in two interrelated questions.

The first is the extent to which housing price and credit movements are explained by changes in interest rates and, by extension, whether monetary policy would be effective in attenuating housing market excesses. The second concerns the effectiveness of non-interest rate policies, such as prudential regulation, as additional tools for stabilizing housing price and credit cycles. This is a crucial issue for central banks seeking to ensure financial stability while simultaneously using interest rate policy in the pursuit of macroeconomic objectives. And it is especially pressing for countries with fixed or heavily managed exchange rates, where there is limited scope for interest rate policy to address property market imbalances. This paper empirically addresses both of these questions using data from 57 economies going back as far as 1980. The scope is therefore considerably broader than most existing work, such as Girouard et al (2006), which has mostly been limited to a smaller set of industrialized countries. We focus in particular on the Asia-Pacific region where non-interest rate policy measures have been used more actively than elsewhere.