Monetary Policy Transmission in a Model with Animal Spirits and House Price Booms and Busts

Peter Bofinger (), Eric Mayer, Johannes Gareis () and ,
Authors registered in the RePEc Author Service: Sebastian Debes

No 8804, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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, which, 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.

Keywords: Monetary policy; Animal spirits; Housing markets (search for similar items in EconPapers)
JEL-codes: D83 E32 E52 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ure
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Journal Article: Monetary policy transmission in a model with animal spirits and house price booms and busts (2013)
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