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
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: Suggested Citation
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