Q2. What is the purpose of this paper?
The goal of this paper is to assess alternative policies in terms of their effectiveness in mitigating boom-bust cycles and macroeconomic volatility and their impact on welfare.
Q3. What is the effect of the solid line with dots on the output and credit growth?
The solid line with dots and the dotted line allow only for a response to current and expected future inflation, respectively; the solid and dashed lines allow also for an interest-rate response to variations in housing prices and credit, respectively.9
Q4. What is the effect of strict inflation targeting on welfare?
The authors find that strict inflation targeting delivers high volatility of both housing prices and the loan-to-GDP ratio and is detrimental to welfare relative to an estimated rule.
Q5. What has forced central banks to reconsider their policy framework?
The recent financial crisis, which was ignited by the bursting of the housing bubble in the United States, has forced central banks to reconsider their policy framework.
Q6. What is the effect of a strong anti-inflationary stance on macroeconomic?
In fact, a strong anti-inflationary stance exacerbates macroeconomic fluctuations because it makes the real rate extremely volatile.
Q7. What is the effect of a strict anti-inflationary stance on the real?
In their framework a strict anti-inflationary stance delivers higher volatility of both housing prices and the loan-to GDP ratio and lower welfare relative to the estimated rule.
Q8. What is the role of LTV rules in reducing the variability of the housing market?
5 Angelini, Neri and Panetta (2010) use ad-hoc loss functions to show that, compared to capital requirement rules, LTV rules are more effective in reducing the variability of the debt-to-GDP ratio.
Q9. What is the way to smooth out the effects of changes in nominal debt?
As suggested earlier, a certain degree of (positive) inflation volatility is optimal in their model as it helps smoothing out the real effects of changes in nominal debt.
Q10. What is the way to explain the welfare of a monetary authority?
The authors assume that, under strict anti-inflationary stance, the monetary authority targets only inflation and credibly maintains it constant without deviating from the target.
Q11. How do the authors compute welfare effects during the transition from one stochastic steady state to another?
In order not to neglect welfare effects occurring during the transition from one stochastic steady state to another, the authors compute the welfare implied by the different rules conditional on the initial state being the deterministic steady state.
Q12. What is the second-order approximate solution for the welfare functions?
In particular, the second-order approximate solution for the welfare functions, V it , takes a simple form V it = f(σ 2) , where σ2 is the variance of the shocks.
Q13. What is the way to avoid the welfare-reducing redistribution generated by nominal contracts?
Mendicino and Pescatori (2008) study ex-ante optimal interest-rate rules under a combination of shocks and show that, in the presence of nominal debt, monetary policy can avoid the welfare-reducing redistribution generated by nominal contracts by stabilizing the real interest rate, thereby allowing agents to share risk optimally.
Q14. What is the welfare performance of the operational rules that determine the interest rate or the LTV ratio?
The authors explore the welfare performance of operational rules that determine either the interest rate or the LTV ratio as a function of observable macroeconomic variables.
Q15. What are the other parameters kept constant and equal to the estimated values?
The other parameters are kept constant and equal to the estimated values, in the case of rY and rR, and to the welfare improving responses for rB and rQ.volatility of household debt is coupled with higher volatility of inflation.
Q16. What is the literature on asset pricemovements and monetary policy?
The literature on asset-pricemovements and monetary policy relies mostly on models of exogenous bubbles, as in Bernanke and Gertler (2001) and Gilchrist and Leahy (2002).
Q17. What is the effect of the exogenous bubbles on asset prices?
Since the insurgence, size and burst of the bubble are exogenously determined, these models do not allow for any feedback from the conduct of monetary policy to the occurrence and the magnitude of boom-bust cycles in asset prices.
Q18. What is the effect of adding an indicator of potential vulnerabilities in the housing market?
First of all, the reaction of housing prices and household debt is dampened by adding an indicator of potential vulnerabilities in the housing market such as credit growth or housing price inflation.
Q19. What is the debate over whether the monetary authority should react to financial variables?
There is an ongoing debate over whether the monetary authority should react to financial variables to avoid bubbles in asset prices and large variations in credit.
Q20. What is the effect of alternative macro-prudential policies?
The effectiveness of alternative macro-prudential policies is measured both in terms of the volatility of the debt-to-GDP ratio and the welfare of the agents in the model.