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House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle (2002)
| Citations: | 512 - 10 self |
BibTeX
@MISC{Iacoviello02houseprices,,
author = {Matteo Iacoviello},
title = {House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle},
year = {2002}
}
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Abstract
I develop a general equilibrium model with sticky prices, credit constraints, nominal loans and asset prices. Changes in asset prices modify agents ’ borrowing capacity through collateral value; changes in nominal prices affect real repayments through debt deflation. Monetary policy shocks move asset and nominal prices in the same direction, and are amplified and propagated over time. The “financial accelerator ” is not constant across shocks: nominal debt stabilises supply shocks, making the economy less volatile when the central bank controls the interest rate. I discuss the role of equity, debt indexation and household and firm leverage in the propagation mechanism. Finally, I find that monetary policy should not target asset prices as a means of reducing output and inflation volatility.
Keyphrases
monetary policy asset price house price high marginal propensity nominal price producer durable good sticky price strong propensity asset accumulation real repayment physical capital debt indexation economic activity james tobin business borrower propagation mechanism financial accelerator monetary policy shock current income general equilibrium model debt deflation net worth firm leverage interest rate inflation volatility collateral value household debtor desired portfolio nominal loan future wage liquid resource people money credit constraint nominal debt stabilises supply shock good reason young family central bank
