Monetary Policy and Housing Prices in an Estimated DSGE for the US and the Euro Area

69 Pages Posted: 29 Nov 2008

Date Written: November 26, 2008


We estimate a two-country Dynamic Stochastic General Equilibrium model for the US and the euro area including relevant housing market features and examine the monetary policy implications of housing-related disturbances. In particular, we derive the optimal monetary policy cooperation consistent with the structural specification of the model. Our estimation results reinforce the existing evidence on the role of housing and mortgage markets for the US and provide new evidence on the importance of the collateral channel in the euro area. Moreover, we document the various implications of credit frictions for the propagation of macroeconomic disturbances and the conduct of monetary policy. We find that allowing for some degree of monetary policy response to fluctuations in the price of residential goods improves the empirical fit of the model and is consistent with the main features of optimal monetary policy response to housing-related shocks.

Keywords: Housing, credit frictions, optimal monetary policy, new open economy macro-economics, Bayesian estimation

JEL Classification: E4, E5, F4

Suggested Citation

Darracq Paries, Matthieu and Notarpietro, Alessandro, Monetary Policy and Housing Prices in an Estimated DSGE for the US and the Euro Area (November 26, 2008). ECB Working Paper No. 972. Available at SSRN:

Matthieu Darracq Paries (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
+496913446631 (Phone)
+496913447604 (Fax)

Alessandro Notarpietro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

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