The Effects of Housing Prices and Monetary Policy in a Currency Union
by Oriol Aspachs-Braconsa and Pau Rabanalb
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.
(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