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Monetary and Macroprudential Policy Rules in a Model with House Price Booms

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  • Kannan Prakash

    (International Monetary Fund)

  • Rabanal Pau

    (International Monetary Fund)

  • Scott Alasdair M.

    (International Monetary Fund)

Abstract

Using a dynamic stochastic general equilibrium (DSGE) model with housing, this paper shows that strong monetary reactions to accelerator mechanisms that push up credit growth and house prices can help macroeconomic stability. In addition, using a macroprudential instrument specifically designed to dampen credit market cycles would also provide stabilization benefits when an economy faces financial sector or housing demand shocks. However, the optimal macroprudential rule under productivity shocks is to not intervene. Therefore, it is crucial to understand the source of house price booms for the design of monetary and macroprudential policy.

Suggested Citation

  • Kannan Prakash & Rabanal Pau & Scott Alasdair M., 2012. "Monetary and Macroprudential Policy Rules in a Model with House Price Booms," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-44, June.
  • Handle: RePEc:bpj:bejmac:v:12:y:2012:i:1:n:16
    DOI: 10.1515/1935-1690.2268
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