Monetary policy transmission in a model with animal spirits and house price booms and busts

Peter Bofinger (), Sebastian Debes, Johannes Gareis () and Eric Mayer

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 12, 2862-2881

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.

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: 2013
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Citations: View citations in EconPapers (24)

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Working Paper: Monetary Policy Transmission in a Model with Animal Spirits and House Price Booms and Busts (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:12:p:2862-2881

DOI: 10.1016/j.jedc.2013.08.002

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