What Should Central Banks Do About Real Estate Prices?
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 the authors consider how inflation targeting should be adapted to account for real estate prices.