Leaning Against Boom-Bust Cycles in Credit and Housing Prices

30 Pages Posted: 25 Mar 2011 Last revised: 21 Feb 2012

See all articles by Luisa Lambertini

Luisa Lambertini

Ecole Polytechnique Fédérale de Lausanne

Caterina Mendicino

Bank of Portugal; European Central Bank (ECB) - Directorate General Research

Maria Teresa Punzi

Vienna University of Economics and Business

Date Written: March 18, 2011

Abstract

This paper studies the potential gains of monetary and macro-prudential policies that lean against news-driven boom-bust cycles in housing prices and credit generated by expectations of future macroeconomic developments. First, we find no trade-off between the traditional goals of monetary policy and leaning against boom-bust cycles. An interest-rate rule that completely stabilizes inflation is not optimal. In contrast, an interest-rate rule that responds to financial variables mitigates macroeconomic and financial cycles and is welfare improving relative to the estimated rule. Second, counter-cyclical Loan-to-Value rules that respond to credit growth do not increase inflation volatility and are more effective in maintaining a stable provision of financial intermediation than interest-rate rules that respond to financial variables. Heterogeneity in the welfare implications for borrowers and savers make it difficult to rank the two policy frameworks.

Keywords: Expectations-driven cycles, Macro-prudential policy, Monetary policy, Welfare analysis

JEL Classification: E32, E44, E52

Suggested Citation

Lambertini, Luisa and Mendicino, Caterina and Punzi, Maria Teresa, Leaning Against Boom-Bust Cycles in Credit and Housing Prices (March 18, 2011). Center for Fiscal Policy, EPFL, Chair of International Finance (CFI) Working Paper No. 2011-01. Available at SSRN: https://ssrn.com/abstract=1789573 or http://dx.doi.org/10.2139/ssrn.1789573

Luisa Lambertini (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

Caterina Mendicino

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Maria Teresa Punzi

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Register to save articles to
your library

Register

Paper statistics

Downloads
96
Abstract Views
555
rank
274,743
PlumX Metrics