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

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  • Pau Rabanal
  • Oriol Aspachs-Bracons

Abstract

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 type 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.

Suggested Citation

  • Pau Rabanal & Oriol Aspachs-Bracons, 2011. "The Effects of Housing Prices and Monetary Policy in a Currency Union," IMF Working Papers 11/6, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:11/6
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    References listed on IDEAS

    as
    1. Oriol Aspachs-Bracons & Pau Rabanal, 2010. "The drivers of housing cycles in Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 1(1), pages 101-130, March.
    2. Darracq Pari├Ęs, Matthieu & Notarpietro, Alessandro, 2008. "Monetary policy and housing prices in an estimated DSGE for the US and the euro area," Working Paper Series 972, European Central Bank.
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    Keywords

    External shocks; European Economic and Monetary Union; Economic models; Demand; Monetary policy; Interest rates; Labor markets; Housing; Housing prices; Spain; Financial Constraints; inflation; monetary economics; central bank; price level; Financial Markets and the Macroeconomy; Open Economy Macroeconomics;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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