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  3. American Economic Review
  4. June 2005
  5. House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle

House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle

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Abstract

I develop and estimate a monetary business cycle model with nominal loans and collateral constraints tied to housing values. Demand shocks move housing and nominal prices in the same direction, and are amplified and propagated over time. The financial accelerator is not uniform: nominal debt dampens supply shocks, stabilizing the economy under interest rate control. Structural estimation supports two key model features: collateral effects dramatically improve the response of aggregate demand to housing price shocks; and nominal debt improves the sluggish response of output to inflation surprises. Finally, policy evaluation considers the role of house prices and debt indexation in affecting monetary policy trade-offs.

Citation

Iacoviello, Matteo. 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle." American Economic Review, 95 (3): 739-764. DOI: 10.1257/0002828054201477

Additional Materials

JEL Classification

  • E32 Business Fluctuations; Cycles
  • R21 Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand