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

Imran Hussain Shaha () and Simon Sosvilla-Rivero
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Imran Hussain Shaha: Department of Economics, University of Bath, Bath, UK.

No 1707, Working Papers del Instituto Complutense de Estudios Internacionales from Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales

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. (search for similar items in EconPapers)
JEL-codes: C32 D53 E31 E52 E58 G12 O52 R31 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2017
New Economics Papers: this item is included in nep-eec, nep-mac and nep-ure
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Working Paper: Seeking price and macroeconomic stabilisation in the euro area: The role of house prices and stock prices (2017)
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