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

Author/Editor: Pau Rabanal | Oriol Aspachs-Bracons
Authorized for Distribution: January 1, 2011
Electronic Access: Free Full Text (PDF file size is 1,188KB)
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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.
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Series: Working Paper No. 11/6
Subject(s): Economic models | External shocks | Housing | Housing prices | Interest rates | Labor markets
Author's keyword(s): Housing | Monetary Policy | Financial Constraints.
    Published:   January 1, 2011        
    ISBN/ISSN:   9781455211845/1018-5941   Format:   Paper
    Stock No:   WPIEA2011006   Pages:   52
    Price:   US$18.00
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