Monetary Policy Transmission in a Model with Animal Spirits and House Price Booms and Busts
AbstractCan monetary policy trigger pronounced boom-bust cycles in house prices and create persistent business cycles? We address this question by building heuristics into an otherwise standard DSGE model. As a result, monetary policy sets off waves of optimism and pessimism ('animal spirits') that drive house prices, which, in turn, have strong repercussions on the business cycle. We compare our findings to a standard model with rational expectations by means of impulse responses. We suggest that a standard Taylor rule is not well-suited to maintain macroeconomic stability. Instead, an augmented rule that incorporates house prices is shown to be superior.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8804.
Date of creation: Jan 2012
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Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-28 (All new papers)
- NEP-CBA-2012-03-28 (Central Banking)
- NEP-DGE-2012-03-28 (Dynamic General Equilibrium)
- NEP-MAC-2012-03-28 (Macroeconomics)
- NEP-MON-2012-03-28 (Monetary Economics)
- NEP-URE-2012-03-28 (Urban & Real Estate Economics)
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