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

 
Author/Editor: Aspachs-Bracons, Oriol ; Rabanal, Pau
 
Publication Date: January 01, 2011
 
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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.
 
Series: Working Paper No. 11/6
Subject(s): Demand | Economic models | European Economic and Monetary Union | External shocks | Housing | Housing prices | Interest rates | Labor markets | Monetary policy | Spain

Author's Keyword(s): Housing | Monetary Policy | Financial Constraints.
 
English
Publication Date: January 01, 2011
Format: Paper
Stock No: WPIEA2011006 Pages: 52
Price:
US$18.00 (Academic Rate:
US$18.00 )
 
 
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