Leaning Against Boom-Bust Cycles in Credit and Housing Prices
This paper studies the potential gains of monetary and macro-prudential policies that lean against news-driven boom-bust cycles in housing prices and credit generated by expectations of future macroeconomic developments. First, we find no trade-off between the traditional goals of monetary policy and leaning against boom-bust cycles. An interest-rate rule that completely stabilizes inflation is not optimal. In contrast, an interest-rate rule that responds to financial variables mitigates macroeconomic and financial cycles and is welfare improving relative to the estimated rule. Second, counter-cyclical Loan-to-Value rules that respond to credit growth do not increase in ation volatility and are more effective in maintaining a stable provision of financial intermediation than interest-rate rules that respond to financial variables. Heterogeneity in the welfare implications for borrowers and savers make it dicult to rank the two policy frameworks.
Year of publication: |
2011
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Authors: | Lambertini, Luisa ; Mendicino, Caterina ; Punzi, Maria Teresa |
Institutions: | Dipartimento di Economia e Finanza (DEF), Libera Università Internazionale degli Studi Sociali Guido Carli (LUISS) |
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