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House Prices and Monetary Policy in Colombia

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  • Martha López

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 deviations of 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

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 349.

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Date of creation: Dec 2005
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Handle: RePEc:chb:bcchwp:349

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  1. Kosuke Aoki & James Proudman & Gertjan Vlieghe, 2002. "House prices, consumption, and monetary policy: a financial accelerator approach," Bank of England working papers 169, Bank of England.
  2. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  3. Mauricio Cardenas & Alejandro Badel, 2003. "La crisis de financiamiento hipotecario en Colombia: Causas y consecuencias," Research Department Publications 4355, Inter-American Development Bank, Research Department.
  4. Olivier Jeanne & Michael D. Bordo, 2002. "Monetary Policy and Asset Prices: Does "Benign Neglect" Make Sense?," IMF Working Papers 02/225, International Monetary Fund.
  5. Javier Gómez & José Darío Uribe & Hernando Vargas, 2002. "The Implementation Of Inflation Targeting In Colombia," BORRADORES DE ECONOMIA 003603, BANCO DE LA REPÚBLICA.
  6. 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.
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