Leaning Against Boom-Bust Cycles in Credit and Housing Prices

Luisa Lambertini, Caterina Mendicino and Maria Teresa Punzi

Working Papers from Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne

Abstract: This paper studies the potential gains of monetary and macro-prudential policies that lean against news-driven boom-bust cycles in housing prices and credit generated by expectations of future macroeconomic developments. First, we find no trade-off between the traditional goals of monetary policy and leaning against boom-bust cycles. An interest-rate rule that completely stabilizes inflation is not optimal. In contrast, an interest-rate rule that responds to financial variables mitigates macroeconomic and financial cycles and is welfare improving relative to the estimated rule. Second, counter-cyclical Loan-to-Value rules that respond to credit growth do not increase inflation volatility and are more effective in maintaining a stable provision of financial intermediation than interest-rate rules that respond to financial variables. Heterogeneity in the welfare implications for borrowers and savers make it difficult to rank the two policy frameworks.

Keywords: Expectations-driven cycles; Macro-prudential policy; Monetary policy; Welfare analysis (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011-03, Revised 2011-03
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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Related works:
Journal Article: Leaning against boom–bust cycles in credit and housing prices (2013)
Working Paper: Leaning Against Boom-Bust Cycles in Credit and Housing Prices (2011)
Working Paper: Leaning Against Boom-Bust Cycles in Credit and Housing Prices (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:cif:wpaper:201101

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