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What Should Central Banks Do about Real Estate Prices?

Author

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  • Allen, Franklin

    (University of PA)

  • Carletti, Elena

    (European University Institute)

Abstract

Many central banks use inflation targeting as the basis for their monetary policy. The underlying notion of this approach is that there are no long term benefits in terms of reduced unemployment from having inflation. The traditional view is that monetary policy should focus on controlling consumer price inflation. Asset prices should only be considered in as much as they feed into consumer prices and short term output. However, Reinhart and Rogoff (2009) provide considerable evidence that collapses in real estate prices are the main cause of many financial crises. In this paper we consider how inflation targeting should be adapted to account for real estate prices. We develop a theory of real estate bubbles and show how these can be triggered by low interest rates. It is suggested that in small homogenous countries like Sweden interest rates can be used to prevent bubbles. In large economies this may not be desirable because bubbles tend to be regional. In all economies macroprudential policies have a role to play in preventing and pricking bubbles. However, there is an important issue of how effective they will be in practice.

Suggested Citation

  • Allen, Franklin & Carletti, Elena, 2011. "What Should Central Banks Do about Real Estate Prices?," Working Papers 11-29, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:11-29
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    File URL: http://fic.wharton.upenn.edu/fic/papers/11/11-29.pdf
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    Cited by:

    1. Braggion, Fabio & Manconi, Alberto & Zhu, Haikun, 2023. "Household credit and regulatory arbitrage: Evidence from online marketplace lending," Other publications TiSEM 9fbc0f2e-26f5-414f-8384-c, Tilburg University, School of Economics and Management.
    2. Manconi, Alberto & Braggion, Fabio & Zhu, Haikun, 2018. "Can Technology Undermine Macroprudential Regulation? Evidence from Peer-to-Peer Credit in China," CEPR Discussion Papers 12668, C.E.P.R. Discussion Papers.
    3. Krzysztof Olszewski, 2012. "The impact of commercial real estate on the financial sector, its tracking by central banks and some recommendations for the macro-financial stability policy of central banks," NBP Working Papers 132, Narodowy Bank Polski.
    4. Andrade, Sandro C. & Bian, Jiangze & Burch, Timothy R., 2013. "Analyst Coverage, Information, and Bubbles," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(5), pages 1573-1605, October.
    5. Antonakakis, Nikolaos & Chatziantoniou, Ioannis & Floros, Christos, 2015. "Dynamic Connectedness of UK Regional Property Prices," MPRA Paper 68421, University Library of Munich, Germany.
    6. Jeroen Hessel & Jolanda Peeters, 2011. "Housing bubbles, the leverage cycle and the role of central banking," DNB Occasional Studies 905, Netherlands Central Bank, Research Department.
    7. Zhu, Haikun, 2018. "Essays on political economy of finance and fintech," Other publications TiSEM 93f94423-e671-4041-bb24-8, Tilburg University, School of Economics and Management.
    8. Nikolaos Antonakakis & Ioannis Chatziantoniou & Christos Floros & David Gabauer, 2018. "The dynamic connectedness of UK regional property returns," Urban Studies, Urban Studies Journal Limited, vol. 55(14), pages 3110-3134, November.
    9. Krzysztof Olszewski, 2013. "The Commercial Real Estate Market, Central Bank Monitoring and Macroprudential Policy," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 5(2), pages 213-250, December.
    10. Jang, Hanwool & Song, Yena & Ahn, Kwangwon, 2020. "Can government stabilize the housing market? The evidence from South Korea," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 550(C).

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