Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/209697
Authors: 
Baldi, Guido
Year of Publication: 
2014
Citation: 
[Journal:] Journal of Housing Economics [ISSN:] 1051-1377 [Volume:] 26 [Pages:] 119-125
Abstract: 
What are the economic effects of a central bank that takes the evolution of house prices into account? In an attempt to answer this question, we use a New Keynesian dynamic stochastic general equilibrium model with a housing sector to explore the economic impacts of a central bank reacting to house price inflation. We examine this in the context of two different shocks that are associated with two factors cited as possible underlying sources of the recent bubble in the housing market and the ensuing financial crisis. First, we allow for a positive shock to the household borrowing constraint. Second, we analyze the effects of a preference shock to housing. Our results indicate that these two shocks lead to a more pronounced increase in house prices and an expansion of the housing sector if the central bank does not react to house prices. If the central bank reacts to house price increases, it must accept lower output growth rates over the business cycle. We also show that welfare decreases if a central bank reacts to house price inflation. Because of these effects, a central bank may be reluctant to react to house price inflation.
Subjects: 
Housing Demand
House Prices
Interest Rates
Consumption and Saving
JEL: 
E21
E22
E58
R21
Published Version’s DOI: 
Document Type: 
Article
Document Version: 
Accepted Manuscript (Postprint)

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