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House Prices and Monetary Policy in Colombia

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  • Martha López

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Abstract

This paper investigates the possible responses of an inflation-targeting monetary policy in the face of asset price deviations from fundamental values. Focusing on the housing sector of the Colombian economy, we consider a general equilibrium model with frictions in credit market and bubbles in housing prices. We show that monetary policy is less efficient when it responds directly to asset price of housing than a policy that reacts only to deviationsof expected inflation (CPI) from target. Some prudential regulation may provide a better outcome in terms of output and inflation variability.

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Bibliographic Info

Article provided by BANCO DE LA REPÚBLICA - ESPE in its journal ENSAYOS SOBRE POLÍTICA ECONÓMICA.

Volume (Year): (2006)
Issue (Month): ()
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Handle: RePEc:col:000107:007498

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Keywords: house price bubbles; interest rate rules; monetary policy; inflationtargeting.;

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  1. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  2. Alejandro Badel & Mauricio Cárdenas, 2003. "La crisis de financiamiento hipotecario en Colombia: causas y consecuencias," IDB Publications 7642, Inter-American Development Bank.
  3. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-64, Summer.
  4. Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003 7, Royal Economic Society.
  5. Jack Selody & Carolyn Wilkins, 2004. "Asset Prices and Monetary Policy: A Canadian Perspective on the Issues," Bank of Canada Review, Bank of Canada, vol. 2004(Autumn), pages 3-14.
  6. Richard Dennis, 2000. "Optimal simple targeting rules for small open economies," Working Paper Series 2000-20, Federal Reserve Bank of San Francisco.
  7. Javier Gómez & José Darío Uribe & Hernando Vargas, 2002. "The Implementation Of Inflation Targeting In Colombia," BORRADORES DE ECONOMIA 003603, BANCO DE LA REPÚBLICA.
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