Authors
1 Assistant professor, university of Buali Sina
2 M.A in economics
Abstract
In this paper we analyze the three responses of monetary policy to bubble in housing prices. First rule corresponds to a monetary authority that does not respond to house price inflation. The second rule corresponds to a monetary authority that respond to overall house price inflation, and in third alternative is a policy in which a monetary authority responds to house price bubble. We use an ARDL model with quarterly data for Iran. The results reveal several practical monetary policy lessons. First، a monetary authority should generally respond to house price bubble because minimizes the loss function. Second، this finding holds even if a monetary authority cannot distinguish between fundamental and bubble house price behavior. Third, monetary authority should tighten when house price bubbles are inflating and should ease when house price bubble collapse.
Keywords
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