40 Pages Posted: 1 Mar 2012
Date Written: January 2012
Can monetary policy trigger pronounced boom-bust cycles in house prices and create persistent business cycles? We address this question by building heuristics into an otherwise standard DSGE model. As a result, monetary policy sets off waves of optimism and pessimism ('animal spirits') that drive house prices, which, in turn, have strong repercussions on the business cycle. We compare our findings to a standard model with rational expectations by means of impulse responses. We suggest that a standard Taylor rule is not well-suited to maintain macroeconomic stability. Instead, an augmented rule that incorporates house prices is shown to be superior.
Keywords: animal spirits, housing markets, monetary policy
JEL Classification: D83, E32, E52
Suggested Citation: Suggested Citation
Bofinger, Peter and Debes, Sebastian and Gareis, Johannes and Mayer, Eric, Monetary Policy Transmission in a Model with Animal Spirits and House Price Booms and Busts (January 2012). CEPR Discussion Paper No. DP8804. Available at SSRN: https://ssrn.com/abstract=2013795
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