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Leaning Against Boom-Bust Cycles in Credit and Housing Prices

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  • Luisa Lambertini

    ()
    (EPFL)

  • Caterina Mendicino

    ()
    (Bank of Portugal)

  • Maria Teresa Punzi

    ()
    (Central Bank of Ecuador)

Abstract

This paper studies the potential gains of monetary and macro-prudential policies that lean against news-driven boom-bust cycles in housing prices and credit generated by expectations of future macroeconomic developments. First, we find no trade-off between the traditional goals of monetary policy and leaning against boom-bust cycles. An interest-rate rule that completely stabilizes inflation is not optimal. In contrast, an interest-rate rule that responds to financial variables mitigates macroeconomic and financial cycles and is welfare improving relative to the estimated rule. Second, counter-cyclical Loan-to-Value rules that respond to credit growth do not increase in ation volatility and are more effective in maintaining a stable provision of financial intermediation than interest-rate rules that respond to financial variables. Heterogeneity in the welfare implications for borrowers and savers make it dicult to rank the two policy frameworks.

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Bibliographic Info

Paper provided by Dipartimento di Economia e Finanza, LUISS Guido Carli in its series Working Papers CELEG with number 1104.

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Date of creation: 2011
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Handle: RePEc:lui:celegw:1104

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