Handling imbalances in the monetary union

Critical economists had noticed it earlier but now the German Bundesbank also warns officially for a too strong increase in real estate prices in many German cities. The central bank talks about an overvaluation of 20%. It’s an opportunity for the Bundesbank to show the rest of Europe how to implement macro prudential policy and how to fight excesses.

The German Bundesbank has it since long in her DNA to not shut her eyes for parties that threaten to get out of hand. However, she no longer has the same instruments to intervene as before.  I have since long argued that if, besides inflation, you also want to fight excesses in specific markets, you will need more than one instrument. You could, for instance, encourage commercial banks to demand a higher own contribution by the investors. Another, more direct, option for the central bank, is to impose commercial banks higher capital buffers for real estate loans.