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Credit Frictions, Housing Prices and Optimal Monetary Policy Rules

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  • Andrea Pescatori

    (Universitat Pompeu Fabra)

  • Caterino Mendicino

    (Stockholm School of Economics)

Abstract

We try to assest the role of household indebtedness and housing prices in the optimal design of monetary policy rules. Even though the relevance of liquidity constraints for consumption behavior has been well documented in the empirical and theoretical literature little attention has been given to credit frictions at the household level in the monetary business cycle litterature. This paper represent the first attemp of a welfare-based monetary policy evaluation in a model with heterogeneous agents and households' credit constraints. In order to evaluate optimal monetary policy we take advantage of the recent advances in computational economics by following the approach illustrated by Schmitt-Grohe and Uribe (2003).

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Bibliographic Info

Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2005 with number 67.

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Date of creation: 03 Sep 2005
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Handle: RePEc:mmf:mmfc05:67

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Web page: http://www.essex.ac.uk/afm/mmf/index.html

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  1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  2. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2001. "Optimal monetary policy," Working Papers 01-5, Federal Reserve Bank of Philadelphia.
  3. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  4. Kosuke Aoki & James Proudman & Gertjan Vlieghe, 2002. "Houses as collateral: has the link between house prices and consumption in the U.K. changed?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 163-177.
  5. Martin Uribe & Stephanie Schmitt-Grohe, 2001. "Optimal fiscal and monetary policy under sticky prices," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  6. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
  7. Schmitt-Grohé, Stephanie & Uribe, Martín, 2001. "Optimal Fiscal and Monetary Policy under Imperfect Competition," CEPR Discussion Papers 2688, C.E.P.R. Discussion Papers.
  8. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  9. Faia, Ester & Monacelli, Tommaso, 2007. "Optimal interest rate rules, asset prices, and credit frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3228-3254, October.
  10. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 75-97, January.
  11. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  12. Guy Debelle, 2004. "Macroeconomic implications of rising household debt," BIS Working Papers 153, Bank for International Settlements.
  13. Jappelli, Tullio & Pagano, Marco, 1989. "Consumption and Capital Market Imperfections: An International Comparison," American Economic Review, American Economic Association, vol. 79(5), pages 1088-1105, December.
  14. anonymous, 2004. "Asset prices and monetary policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 67, march.
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Cited by:
  1. Lambertini, Luisa & Mendicino, Caterina & Punzi, Maria Teresa, 2010. "Expectations-Driven Cycles in the Housing Market," MPRA Paper 26128, University Library of Munich, Germany.
  2. Büyükkarabacak, Berrak & Mykhaylova, Olena, 2010. "Housing market dynamics and welfare," MPRA Paper 23322, University Library of Munich, Germany.
  3. Rubio, Margarita & Carrasco-Gallego, José A., 2012. "Macroprudential Measures, Housing Markets, and Monetary Policy," Dynare Working Papers 23, CEPREMAP.

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