Seeking Price and Macroeconomic Stabilisation in the Euro Area: The Role of House Prices and Stock Prices

35 Pages Posted: 18 May 2017

See all articles by Imran Shah

Imran Shah

University of Bath

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Date Written: May 2, 2017

Abstract

We propose an Economic Stability Index (ESI) incorporating house prices and stock prices as components of the measure of the inflation rate in order to allow the European Central Bank (ECB) to achieve both price and macroeconomic stability. We use an optimisation approach to estimate target weights for different sectoral prices in the broader price index, which depend on sectoral parameters other than those used to compute the Harmonised Index of Consumer Prices applied by the ECB to gauge price stability in the euro area (EA). Our results suggest that if the ECB had targeted the ESI, it would have implemented a different monetary policy which would had increased stability in the EA’s economic activity and would have helped to create adequate preconditions for sustainable economic growth and job creation.

Keywords: Stock prices, House prices, Inflation targeting, Macroeconomic stabilization, Euro area.

JEL Classification: C32, D53, E31, E52, E58, G12, 052, R31.

Suggested Citation

Shah, Imran and Sosvilla-Rivero, Simon, Seeking Price and Macroeconomic Stabilisation in the Euro Area: The Role of House Prices and Stock Prices (May 2, 2017). Available at SSRN: https://ssrn.com/abstract=2970553 or http://dx.doi.org/10.2139/ssrn.2970553

Imran Shah

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

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