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http://hdl.handle.net/10419/53941
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| Title: | | Optimal monetary policy during endogenous housing-market boom-bust cycles  |
| Authors: | | Tomura, Hajime |
| Issue Date: | | 2009 |
| Series/Report no.: | | Bank of Canada Working Paper 2009,32 |
| Abstract: | | This paper uses a small-open economy model for the Canadian economy to examine the optimal Taylor-type monetary policy rule that stabilizes output and inflation in an environment where endogenous boom-bust cycles in house prices can occur. The model shows that boom-bust cycles in house prices emerge when credit-constrained mortgage borrowers expect that future house prices will rise and this expectation is neither shared by savers nor realized ex-post. These boom-bust cycles replicate the stylized features of housing-market boom-bust cycles in industrialized countries. In an environment where mortgage borrowers are occasionally over-optimistic, the central bank should be less responsive to inflation, more responsive to output, and slower to adjust the nominal policy interest rate. This optimal monetary policy rule dampens endogenous boom-bust cycles in house prices, but prolongs inflation target horizons due to weak policy reactions to inflation fluctuations after fundamental shocks. |
| Subjects: | | Credit and credit aggregates Financial stability Inflation targets |
| JEL: | | E44 E52 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Bank of Canada Working Papers
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