Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 217: Do Central Banks React to House Prices?

Daria Finocchiaro () and Virginia Queijo von Heideken ()
Additional contact information
Daria Finocchiaro: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Virginia Queijo von Heideken: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: The substantial fluctuations in house prices recently experienced by many industrialized economies have stimulated a vivid debate on the possible implications for monetary policy. In this paper, we ask whether the U.S. Fed, the Bank of Japan and the Bank of England have reacted to house prices. We study the responses of these central banks by estimating a structural model for each country where credit constrained agents borrow against real estate. The main result is that house price movements did play a separate role in the U.S., U.K.. and Japanese central bank reaction functions.

Keywords: House prices; monetary policy; DSGE models; Bayesian estimation

JEL-codes: E31; E44; E52; E58

51 pages, First version: November 1, 2007. Revised: August 1, 2009. Earlier revisions: August 1, 2009.

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