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.