Template-Type: ReDIF-Paper 1.0
Author-Name: Luisa Lambertini 
Author-X-Name-First: Luisa
Author-X-Name-Last: Lambertini
Author-Email: luisa.lambertini@epfl.ch
Author-Workplace-Name: Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland
Author-Name: Caterina Mendicino
Author-X-Name-First: Caterina
Author-X-Name-Last: Mendicino
Author-Name: Maria Teresa Punzi
Author-X-Name-First: Maria Teresa
Author-X-Name-Last: Punzi
Title: Leaning Against Boom-Bust Cycles in Credit and Housing Prices
Abstract: 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 inflation 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 difficult to rank the two policy frameworks.
Length: 30 pages		
Creation-Date: 2011-03
Revision-Date:2011-03
Publication-Status: 
File-URL: http://infoscience.epfl.ch/record/164310/files/CFP2011_01.pdf
Number:
Classification-JEL: E32, E44, E52
Keywords: Expectations-driven cycles, Macro-prudential policy, Monetary policy, Welfare analysis
Handle: RePEc:cif:wpaper:201101