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The Fed’s TRAP

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Author Info

  • Alexander Erler

    ()

  • Christian Drescher

    ()

  • Damir Križanac

    ()

Abstract

The article examines if US monetary policy implicitly responds to asset price booms. Using real-time data and a GMM framework we estimate a Taylor-type rule with an asset variable that captures phases of booms and busts in the real estate market. We identify quasi real-time booms and busts using an asset cycle dating procedure. Our analysis yields two main findings. Firstly, the Fed does implicitly respond to asset price booms in the real estate market. Secondly, these responses are typically pro-cyclic and their intensity changes over time. Copyright Springer Science+Business Media, LLC 2013

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File URL: http://hdl.handle.net/10.1007/s12197-011-9173-z
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Bibliographic Info

Article provided by Springer in its journal Journal of Economics and Finance.

Volume (Year): 37 (2013)
Issue (Month): 1 (January)
Pages: 136-149

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Handle: RePEc:spr:jecfin:v:37:y:2013:i:1:p:136-149

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Web page: http://link.springer.de/link/service/journals/120857/index.htm

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Related research

Keywords: Federal Reserve; Monetary Policy; Taylor Rule; Asset Price Cycles; Real Estate; E52; E58;

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References

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  1. Sebastian Edwards & Javier Gomez Biscarri & Fernando Perez de Gracia, 2003. "Stock Market Cycles, Financial Liberalization and Volatility," NBER Working Papers 9817, National Bureau of Economic Research, Inc.
  2. John B. Taylor, 2007. "Housing and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 463-476.
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  8. Marvin Goodfriend, 1987. "Interest rate smoothing and price level trend-stationarity," Working Paper 87-03, Federal Reserve Bank of Richmond.
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  10. Sanvi Avouyi-Dovi & Julien Matheron, 2005. "Interactions between business cycles, financial cycles and monetary policy: stylised facts," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 273-98 Bank for International Settlements.
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  12. Leonardo Gambacorta, 2009. "Monetary policy and the risk-taking channel," BIS Quarterly Review, Bank for International Settlements, December.
  13. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
  14. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  15. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
  16. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
  17. Nouriel Roubini, 2006. "Why Central Banks Should Burst Bubbles," International Finance, Wiley Blackwell, vol. 9(1), pages 87-107, 05.
  18. Javier Gómez Biscarri & Fernando Pérez de Gracia, 2002. "Stock Market Cycles and Stock Market Development in Spain," Faculty Working Papers 01/02, School of Economics and Business Administration, University of Navarra.
  19. Adrian R. Pagan & Kirill A. Sossounov, 2003. "A simple framework for analysing bull and bear markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 23-46.
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