The Fed's Trap: A Taylor-Type Rule with Asset Prices

Wirtschaftswissenschaftliche Diskussionspapiere der Universität Bayreuth Discussion Paper No. 03-10

17 Pages Posted: 14 Jun 2010 Last revised: 16 Jun 2010

See all articles by Christian Drescher

Christian Drescher

University of Bayreuth

Alexander Erler

University of Bayreuth - Chair of Economics I - International Economics and Finance

Damir Krizanac

Universität Bayreuth - Chair of Economics II Esp. Macroeconomics

Date Written: June 14, 2010

Abstract

The paper examines if US monetary policy implicitly responds to asset prices. Using real-time data and a GMM framework we estimate a Taylor-type rule with an asset cycle variable, which refers to real estate prices. To analyze the Fed’s responses we describe real estate price movements by means of an asset cycle dating procedure. This procedure reveals quasi real-time bull and bear markets. Our analysis yields two main findings. Firstly, the Fed does implicitly respond to real estate prices. Secondly, these responses are pro-cyclical and their intensity changes over time.

Keywords: Fed, Monetary Policy, Taylor Rule, Asset Price Cycles, Real Estate

JEL Classification: E52, E58

Suggested Citation

Drescher, Christian and Erler, Alexander and Krizanac, Damir, The Fed's Trap: A Taylor-Type Rule with Asset Prices (June 14, 2010). Wirtschaftswissenschaftliche Diskussionspapiere der Universität Bayreuth Discussion Paper No. 03-10, Available at SSRN: https://ssrn.com/abstract=1624868 or http://dx.doi.org/10.2139/ssrn.1624868

Christian Drescher

University of Bayreuth ( email )

Universitätsstraße 30
Bayreuth, DE Bayern 95447
Germany

Alexander Erler (Contact Author)

University of Bayreuth - Chair of Economics I - International Economics and Finance ( email )

Universitaetsstr. 30
D-95447 Bayreuth
Germany

Damir Krizanac

Universität Bayreuth - Chair of Economics II Esp. Macroeconomics ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

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