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...edian household income to income necessary to 8 Microprudential regulation obviously is an important part of the equation as ell but is beyond the scope of the paper, where we pay more attention to systemic mplications of real estate boom–busts and linkages to the real economy rather than he soundness of individual financial institutions. 9 A growing literature uses dynamic stochastic general equilibrium (DSGE) modls to study the role of credit market frictions and the effectiveness of various policy ools in dealing with rapid credit and property price movements. See, among others, MF, 2009; Cúrdia and Woodford, 2010; Iacoviello and Neri, 2010; Angelini et al., 010; Christiano et al., 2010; Quint and Rabanal, 2013; Gelain et al., 2012; Kannan t al., 2012. While offering valuable insights, many of these models have caveats no room for “bubbles” – i.e., house prices fluctuations reflect changes in fundamenals rather than potential deviation from fundamentals, exogenous banking sector arkups that are independent of bank balance sheets, etc.). These caveats may limit he ability to derive practical policy conclusions. In contrast, our focus in this paper s exactly on these practicality issues. c f m h t w e a ...

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... in which monetary factors do not play an active role.sIncluding “frictions” in such models might be useful as a research strategy, but cannot givespractical advice to monetary policymakers (see e.g. =-=Curdia and Woodford, 2010-=-). Svenssons(2009, p. 7) makes a rather sober statement:s“Before such extensions of the modelling framework are operational policymakerssand staff have to improvise and apply unusual amounts of judgem...

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...e in principle derived (see e.g. Giannoni and Woodford, 2002a,b), the NNS model is often closed with “simple” rules such as the Taylor (1993) rule6 (more on that in Section 3.3): iτt = r n t + φππt + φyyt, (3) where iτ is the interest rate target of the central bank, φy > 0 and φπ > 1. Medium scale DSGE models (see e.g. Christiano et al., 2005; Smets and Wouters, 2003, 2007) are usually expanded to account for investment dynamics. Moreover, given the strong interactions between financial markets and the real economy showed by the Great Financial crisis, a new vintage of DSGE models (see e.g. Curdia and Woodford, 2010, 2011; Christiano et al., 2011; Gertler and Kiyotaki, 2010; Gertler and Karadi, 2011) has tried to embody the credit market into the canonical model. 6Originally, the Taylor rule was just designed for normative purposes, i.e. to provide recommendations on how monetary policy should be carried out (Taylor, 2007). Later the Taylor rule assumed a positive role given its good explanatory and predictive power. 5 Before performing policy exercises with DSGE models, one should assess their empirical performance and calibrate their parameters. At this stage, different type of shocks (e.g. government ...