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Monetary policy transmission in a model with animal spirits and house price booms and busts

  • Bofinger, Peter
  • Debes, Sebastian
  • Gareis, Johannes
  • Mayer, Eric

Can 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, that, 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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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 12 ()
Pages: 2862-2881

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:12:p:2862-2881
DOI: 10.1016/j.jedc.2013.08.002
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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