Monetary and Macroprudential Policy Rules in a Model with House Price Booms
37 Pages Posted: 24 Nov 2009
Date Written: September 2009
We argue that a stronger emphasis on macrofinancial risk could provide stabilization benefits. Simulations results suggest that strong monetary reactions to accelerator mechanisms that push up credit growth and asset prices could help macroeconomic stability. In addition, using a macroprudential instrument designed specifically to dampen credit market cycles would also be useful. But invariant and rigid policy responses raise the risk of policy errors that could lower, not raise, macroeconomic stability. Hence, discretion would be required.
Keywords: Asset prices, Capital markets, Central banks, Credit controls, Credit demand, Credit risk, Economic models, External shocks, Household credit, Housing prices, Monetary policy, Price increases
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