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Seeking price and macroeconomic stabilisation in the euro area: The role of house prices and stock prices

Imran Hussain Shah and Simon Sosvilla-Rivero ()

No 201710, IREA Working Papers from University of Barcelona, Research Institute of Applied Economics

Abstract: We propose an Economic Stability Index (ESI) incorporating house prices and stock prices as components of the measure of the inflation rate in order to allow the European Central Bank (ECB) to achieve both price and macroeconomic stability. We use an optimisation approach to estimate target weights for different sectoral prices in the broader price index, which depend on sectoral parameters other than those used to compute the Harmonised Index of Consumer Prices applied by the ECB to gauge price stability in the euro area (EA). Our results suggest that if the ECB had targeted the ESI, it would have implemented a different monetary policy which would had increased stability in the EA’s economic activity and would have helped to create adequate preconditions for sustainable economic growth and job creation.

Keywords: Stock prices; House prices; Inflation targeting; Macroeconomic stabilization; Euro area. JEL classification:C32, D53, E31, E52, E58, G12, 052, R31. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-ure
Date: 2017-05, Revised 2017-05
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