Purchase - $5.00

Monetary Policy Transmission in a Model with Animal Spirits and House Price Booms and Busts

40 Pages Posted: 1 Mar 2012  

Peter Bofinger

University of Würzburg - Institute of Economics and Social Sciences

Sebastian Debes

University of Wuerzburg

Johannes Gareis

affiliation not provided to SSRN

Eric Mayer

affiliation not provided to SSRN

Date Written: January 2012

Abstract

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

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

Peter Bofinger (Contact Author)

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany
+49 931 312 944/5 (Phone)
+49 931 312 775 (Fax)

Sebastian Debes

University of Wuerzburg ( email )

Sanderring 2
Wuerzburg, D-97070
Germany

Johannes Gareis

affiliation not provided to SSRN ( email )

Eric Mayer

affiliation not provided to SSRN ( email )

Paper statistics

Downloads
4
Abstract Views
402