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Seeking price and macroeconomic stabilisation in the euro area: The role of house prices and stock prices

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2017
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Instituto Complutense de Estudios Internacionales (ICEI)
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We propose an Economic Stability Index (ESI) incorporating house prices and stock prices as components of the measure of the inflation rate in order to allow the European Central Bank (ECB) to achieve both price and macroeconomic stability. We use an optimisation approach to estimate target weights for different sectoral prices in the broader price index, which depend on sectoral parameters other than those used to compute the Harmonised Index of Consumer Prices applied by the ECB to gauge price stability in the euro area (EA). Our results suggest that if the ECB had targeted the ESI, it would have implemented a different monetary policy which would had increased stability in the EA’s economic activity and would have helped to create adequate preconditions for sustainable economic growth and job creation.
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This work was supported by the Banco de España through [grant from Programa de Ayudas a la Investigación 2016–2017 en Macroeconomía, Economía Monetaria, Financiera y Bancaria e Historia Económica]; the Spanish Ministry of Education, Culture and Sport [grant PRX16/00261]; and the Spanish Ministry of Economy and Competitiveness [grant ECO2016-76203-C2-2-P].
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