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The Effects of Housing Prices and Monetary Policy in a Currency Union

  • Oriol Aspachs-Bracons

    (Research Department, Caixa d’Estalvis i Pensions de Barcelona)

  • Pau Rabanal

    (Research Department, International Monetary Fund)

The recent boom-and-bust cycle in housing prices has refreshed the debate on the drivers of housing cycles as well as the appropriate policy response. We analyze the case of Spain, where housing prices have soared since it joined the EMU. We present evidence based on a VAR model, and we calibrate a New Keynesian model of a currency area with durable goods to explain it.We find that labor market rigidities provide stronger amplification effects to all types of shocks than financial frictions do. Finally, we show that when the central bank reacts to house prices, the non-durable sector suffers an important contraction. As a result, the boom-and-bust cycle would not have been avoided if Spain had remained outside the EMU during the 1996–2007 period.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 7 (2011)
Issue (Month): 1 (March)
Pages: 225-274

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Handle: RePEc:ijc:ijcjou:y:2011:q:1:a:11
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  1. Oriol Aspachs-Bracons & Pau Rabanal, 2010. "The drivers of housing cycles in Spain," SERIEs, Spanish Economic Association, vol. 1(1), pages 101-130, March.
  2. Darracq Pariès, Matthieu & Notarpietro, Alessandro, 2008. "Monetary policy and housing prices in an estimated DSGE for the US and the euro area," Working Paper Series 0972, European Central Bank.
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