The Effects of Housing Prices and Monetary Policy in a Currency Union

Pau Rabanal and Oriol Aspachs-Bracons

No 2011/006, IMF Working Papers from International Monetary Fund

Abstract: The recent boom-and-bust cycle in housing prices has refreshed the debate on the drivers of housing cycles as well as the appropriate policy response. We analyze the case of Spain, where housing prices have soared since it joined the EMU. We present evidence based on a VAR model, and we calibrate a New Keynesian model of a currency area with durable goods to explain it. We find that labor market rigidities provide stronger amplification effects to all type of shocks than financial frictions do. Finally, we show that when the central bank reacts to house prices, the non-durable sector suffers an important contraction. As a result, the boom-and-bust cycle would not have been avoided if Spain had remained outside the EMU during the 1996-2007 period.

Keywords: WP; demand shock; monetary policy; interest rate (search for similar items in EconPapers)
Pages: 52
Date: 2011-01-01
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Citations: View citations in EconPapers (39)

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Journal Article: The Effects of Housing Prices and Monetary Policy in a Currency Union (2011)
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