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The Fed's TRAP: A Taylor-type Rule with Asset Prices

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  • Drescher, Christian
  • Erler, Alexander
  • Krizanac, Damir

Abstract

The paper examines if US monetary policy implicitly responds to asset prices. Using real-time data and a GMM framework we estimate a Taylor-type rule with an asset cycle variable, which refers to real estate prices. To analyze the Fed's responses we describe real estate price movements by means of an asset cycle dating procedure. This procedure reveals quasi real-time bull and bear markets. Our analysis yields two main findings. Firstly, the Fed does implicitly respond to real estate prices. Secondly, these responses are pro-cyclical and their intensity changes over time.

Suggested Citation

  • Drescher, Christian & Erler, Alexander & Krizanac, Damir, 2010. "The Fed's TRAP: A Taylor-type Rule with Asset Prices," MPRA Paper 23293, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:23293
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Fed; Monetary Policy; Taylor Rule; Asset Price Cycles; Real Estate;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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