Discussion of “The Effects of Housing Prices and Monetary Policy in a Currency Union”

Central questions raised by recent experience are “why do housing prices fluctuate?” and “what should central banks do about it?” For member states of a currency union, such as Spain or Texas, independent monetary policy cannot be conducted, so that it is important to inquire whether fluctuating housing prices make currency union participation undesirable. In this timely paper, Oriol Aspachs-Bracons and Pau Rabanal provide some useful insights into the nature of the Spanish experience, into the mechanics of a two-region dynamic stochastic general equilibrium (DSGE) model that contains a housing sector in each region, and on the differences between responses to various shocks under alternative policy rules. It is one component of the authors’ recent work that contributes to a rapidly growing literature on housing and macroeconomics. Since housing is a durable good, the authors draw on two relevant background literatures, each of which is New Keynesian in structure. In terms of the housing literature, the DSGE model analysis builds most directly on prior work by Iacoviello and Neri (2010), which constructs a closed-economy macroeconomic model with separate sectors for “final consumption” and “housing investment.” In the housing literature, central questions are the response of housing investment, housing prices, final consumption, and aggregate output to shocks in monetary policy in housing demand. In terms of the durability literature, the DSGE model analysis is related to work by Barsky, House, and Kimball (2007), Monacelli (2009), and Sterk (2010) that also studies closed-economy models with separate sectors that are “non-durable” and “durable” in nature. In both housing and durability literatures, a variety of nominal frictions are examined, including wage and price stickiness. In both literatures,