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Seeking price and macroeconomic stabilisation in the euro area: The role of house prices and stock prices

Author

Listed:
  • Imran Hussain Shah

    () (Faculty of Humanities & Social Sciences, University of Bath)

  • Simón Sosvilla-Rivero

    () (Complutense Institute for International Studies, Universidad Complutense de Madrid; 28223 Madrid, Spain.)

Abstract

We propose an Economic Stability Index (ESI) incorporating house prices and stock prices as components of the measure of the inflation rate in order to allow the European Central Bank (ECB) to achieve both price and macroeconomic stability. We use an optimisation approach to estimate target weights for different sectoral prices in the broader price index, which depend on sectoral parameters other than those used to compute the Harmonised Index of Consumer Prices applied by the ECB to gauge price stability in the euro area (EA). Our results suggest that if the ECB had targeted the ESI, it would have implemented a different monetary policy which would had increased stability in the EA’s economic activity and would have helped to create adequate preconditions for sustainable economic growth and job creation.

Suggested Citation

  • Imran Hussain Shah & Simón Sosvilla-Rivero, 2017. "Seeking price and macroeconomic stabilisation in the euro area: The role of house prices and stock prices," IREA Working Papers 201710, University of Barcelona, Research Institute of Applied Economics, revised May 2017.
  • Handle: RePEc:ira:wpaper:201710
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    Keywords

    Stock prices; House prices; Inflation targeting; Macroeconomic stabilization; Euro area. JEL classification:C32; D53; E31; E52; E58; G12; 052; R31.;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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