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March 2011 issue
List of authors
 
Gagnon, Raskin, Remache and Sack
García-Cicco
Christiano
Erceg, Guerrieri and Kamin
Galati, Poelhekke and Zhou
Hayashi
Aspachs-Bracons and Rabanal
Forlati and Lambertini
Williams
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The Effects of Housing Prices and Monetary Policy in a Currency Union

by Oriol Aspachs-Braconsa and Pau Rabanalb

Abstract

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 types 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.

JEL Codes: E44, E52, F41.

 
Full article (PDF, 50  pages 1415 kb)

Discussion by Robert G. King

 


a Research Department, Caixa d’Estalvis i Pensions de Barcelona
b Research Department, International Monetary Fund