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

Author(s): Peter Bofinger, Sebastian Debes, Johannes Gareis and Eric Mayer

Publication Date: January 2012

Keyword(s): animal spirits, housing markets and monetary policy

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Bofinger, P, Debes, S, Gareis, J and Mayer, E. 2012. 'Monetary Policy Transmission in a Model with Animal Spirits and House Price Booms and Busts'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8804