House Prices and Monetary Policy

Brito PauloMarini GiancarloPiergallini Alessandro
CEIS Research Paper
This paper analyzes global dynamics in an overlapping generations general equilibrium model with housing-wealth effects. It shows that monetary policy cannot burst rational bubbles in the housing market. Under monetary policy rules of the Taylor-type, there exist global self-fulfilling paths of house prices along a heteroclinic orbit connecting multiple equilibria. From bifurcation analysis, the orbit features a boom (bust) in house prices when monetary policy is more (less) active. The paper also demonstrates that boom or busts cannot be ruled out by interest-rate feedback rules responding to both inflation and house prices
Number: 250
Keywords: House Prices; Housing-Wealth Effects; Monetary Policy Rules; Global Determinacy; Heteroclinic Orbits.
JEL codes: E62; H60; C20
Date: Wednesday, August 1, 2012
Revision Date: Wednesday, August 1, 2012