DP8804 Monetary Policy Transmission in a Model with Animal Spirits and House Price Booms and Busts
|Author(s):||Peter Bofinger, Sebastian Debes, Johannes Gareis, Eric Mayer|
|Publication Date:||January 2012|
|Keyword(s):||animal spirits, housing markets, monetary policy|
|JEL(s):||D83, E32, E52|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=8804|
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.