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Housing Bubble or Recession? You Might Have to Pick One

Friday, August 7, 2015

There are two conflicting theories on how or even if monetary policy should play a role in stabilizing asset price booms and busts.  If central banks use interest rate hikes sufficient to curb leverage and curb booms it might also boost unemployment and lower inflation, deviating from the central bank's goals of full employment and price stability.  The alternative is to concentrate on those dual goals and allow financial regulation and supervision to deal separately with threats to financial stability.

A new Economic Letter, Interest Rates and House Prices: Pill or Poison?  from the Federal Reserve Bank of San Francisco and written by Òscar Jordà, vice president in the banks Economic Research Department, Moritz Schularick, and Alan M. Taylor  professors of economics at the University of Bonn and the University of California, Davis respectively looks at the link between interest rates, mortgage lending, and house prices.ncontestable, its wisdom is debatable," the authors say.

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