Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098677 | Journal of Economic Dynamics and Control | 2013 | 20 Pages |
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, that, 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.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Peter Bofinger, Sebastian Debes, Johannes Gareis, Eric Mayer,