Monetary policy transmission in a model with animal spirits and house price booms and busts |
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Authors: | Peter Bofinger Sebastian Debes Johannes Gareis Eric Mayer |
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Institution: | 1. Department of Economics and Finance, Institute for Advanced Studies, Stumpergasse 56, A-1060 Vienna, Austria;2. IREBS, University of Regensburg, Universitaetstrasse 31, 93053 Regensburg, Germany;3. Institute for Advanced Studies, Austria;4. Department of Economics, University of California, Davis, CA 95616, United States |
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Abstract: | 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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Keywords: | Monetary policy Animal spirits Housing markets |
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