Download This PaperHouse Prices and Monetary Policy
47 Pages Posted: 5 Aug 2012
Date Written: August 1, 2012
Abstract
This paper analyzes global dynamics in an overlapping generations general equilibrium model with housing-wealth effects. It shows that monetary policy cannot burst rational bubbles in the housing market. Under monetary policy rules of the Taylor-type, there exist global self-fulfilling paths of house prices along a heteroclinic orbit connecting multiple equilibria. From bifurcation analysis, the orbit features a boom (bust) in house prices when monetary policy is more (less) active. The paper also demonstrates that boom or busts cannot be ruled out by interest-rate feedback rules responding to both inflation and house prices.
Keywords: House Prices, Housing-Wealth Effects, Monetary Policy Rules, Global Determinacy, Heteroclinic Orbits
JEL Classification: E62, H60, C20
Suggested Citation: Suggested Citation
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