Optimal monetary policy during endogenous housing-market boom-bust cycles

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Working Paper ; No. 2009-32

Classification and Topics

• Classification: Wirtschaft ; Financial Markets and the Macroeconomy ; Monetary Policy
• Subject: Credit and credit aggregates ; Financial stability ; Inflation targets ; Konjunktur ; Immobilienpreis ; Geldpolitik ; Gesamtwirtschaftliche Produktion ; Inflationsrate ; Taylor-Regel ; Kleines-offenes-Land ; Kanada

Contributors, Location and Time

• Event: Geistige Schöpfung
• (who): Tomura, Hajime
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2009

Further information

• DOI: doi:10.34989/swp-2009-32
• Handle: http://hdl.handle.net/10419/53941
• Last update: 20.09.2024, 8:23 AM CEST