New PDF release: House Prices and the Macroeconomy: Implications for Banking

By Charles Goodhart, Boris Hofmann

ISBN-10: 0199204594

ISBN-13: 9780199204595

The macroeconomic implications of asset cost flucuations have got expanding realization in educational and coverage circles lately, largely end result of the fresh boom-bust bubbles within the fairness and now housing markets. This booklet goals to enquire the function of asset costs for numerous points of the macroeconomy.

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Extra info for House Prices and the Macroeconomy: Implications for Banking and Price Stability

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From the credit perspective, property prices are more likely than equity prices to have an effect on consumer prices, as property is more likely to serve as collateral than is equity. Long-term nominal interest rates reflect, according to the expectations theory of the term structure, expected future short-term nominal interest rates. e. long-term nominal interest rates less short-term nominal interest rates, would provide a measure of expected future inflation. g. Mishkin 1990). If, then, we are concerned to assess whether asset price movements contain useful information (in addition to interest rates and monetary growth) on future activity and inflationary pressures, there seems no necessary presumption that attention should be concentrated on just the exchange rate.

In contrast, many other countries around the world experienced at least two strong cycles in housing prices, in the early 1970s and late 1980s, and these preceded strong inflationary surges. Correlation does not prove causation, and it could possibly be that the cycles in housing prices and in goods and services price (CPI) inflation were largely independent, or driven by common factors. In truth, there have only been a few cycles, and hence only a small number of (real) degrees of freedom in our data set.

However, simultaneity problems may already arise from including interest rates and exchange rates in the analysis. The Central Bank raises interest rates in anticipation of future positive output gaps, and exchange rates appreciate in anticipation of positive gaps, which could trigger rising interest rates. Thus, including property and share prices in the analysis does not introduce a problem that has not potentially been there before. In the literature on monetary policy transmission and monetary policy rules it is always assumed that the information set of the Central Bank can be characterized by lags of endogenous and exogenous variables, so that no simultaneity problem arises.

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House Prices and the Macroeconomy: Implications for Banking and Price Stability by Charles Goodhart, Boris Hofmann

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