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The Fed's TRAP: A Taylor-type Rule with Asset Prices

Drescher, Christian and Erler, Alexander and Krizanac, Damir (2010): The Fed's TRAP: A Taylor-type Rule with Asset Prices.

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Abstract

The paper examines if US monetary policy implicitly responds to asset prices. Using real-time data and a GMM framework we estimate a Taylor-type rule with an asset cycle variable, which refers to real estate prices. To analyze the Fed's responses we describe real estate price movements by means of an asset cycle dating procedure. This procedure reveals quasi real-time bull and bear markets. Our analysis yields two main findings. Firstly, the Fed does implicitly respond to real estate prices. Secondly, these responses are pro-cyclical and their intensity changes over time.

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