The Effects of Housing Prices and Monetary Policy in a Currency Union

January 1, 2011

Preview Citation

Format: Chicago

Pau Rabanal, and Oriol Aspachs-Bracons. The Effects of Housing Prices and Monetary Policy in a Currency Union, (USA: International Monetary Fund, 2011) accessed December 27, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The recent boom-and-bust cycle in housing prices has refreshed the debate on the drivers of housing cycles as well as the appropriate policy response. We analyze the case of Spain, where housing prices have soared since it joined the EMU. We present evidence based on a VAR model, and we calibrate a New Keynesian model of a currency area with durable goods to explain it. We find that labor market rigidities provide stronger amplification effects to all type of shocks than financial frictions do. Finally, we show that when the central bank reacts to house prices, the non-durable sector suffers an important contraction. As a result, the boom-and-bust cycle would not have been avoided if Spain had remained outside the EMU during the 1996-2007 period.

Subject: Consumption, Housing, Housing prices, Inflation, Labor

Keywords: Demand shock, Interest rate, Monetary policy, WP

Publication Details

Pages:

52
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/006
Stock No:

WPIEA2011006
ISBN:

9781455211845
ISSN:

1018-5941

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