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Monetary Policy and House Price Volatility

Grzegorz Wesołowski

Central European Journal of Economic Modelling and Econometrics, 2021, vol. 13, issue 4, 359-379

Abstract: House prices are of special importance for monetary policy since their sudden falls are usually associated with credit crunch followed by long-lasting and painful recessions. Despite several spectacular episodes of such events, each time house prices exhibit long-lasting growth trend with little volatility around it, it is argued that this pattern is a “new normal”. This paper shows that a central bank following this view would increase the volatility of inflation and output as compared to a policy that assumes high volatility of house prices. In the former case the monetary authority would conduct too accommodative monetary policy during abrupt house price expansions significantly increasing output and inflation fluctuations. In the latter situation, in turn, the policy would work well irrespective of the realized house price volatility.

Keywords: monetary policy; house prices; model uncertaint (search for similar items in EconPapers)
JEL-codes: E32 E52 E58 (search for similar items in EconPapers)
Date: 2021
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Handle: RePEc:psc:journl:v:13:y:2021:i:4:p:359-379