The paper explores the role of house prices, borrowing constraints, and monetary policy in business cycles. It develops and estimates a monetary business cycle model with nominal loans and collateral constraints tied to housing values. The model shows that demand shocks affect both housing and nominal prices, and these shocks are amplified and propagated over time. The financial accelerator is not uniform: nominal debt dampens supply shocks, stabilizing the economy under interest rate control. Structural estimation supports two key model features: collateral effects dramatically improve the response of aggregate demand to house price shocks; nominal debt improves the sluggish response of output to inflation surprises. Policy evaluation considers the role of house prices and debt indexation in affecting monetary policy trade-offs. The model incorporates a financial accelerator mechanism where endogenous variations in the balance sheet of firms generate a "financial accelerator" by enhancing the amplitude of business cycles. The model includes collateral constraints tied to real estate values for firms and a subset of households, as well as nominal debt. The model's transmission mechanism works as follows: a positive demand shock leads to increased consumer and asset prices, which increases the borrowing capacity of debtors, allowing them to spend and invest more. The rise in consumer prices reduces the real value of their outstanding debt obligations, positively affecting their net worth. Given that borrowers have a higher propensity to spend than lenders, the net effect on demand is positive, acting as a powerful amplification mechanism. However, while it amplifies demand shocks, consumer price inflation dampens the shocks that induce a negative correlation between output and inflation. The model successfully explains two key features of the data: a positive response of spending to a house price shock and a hump-shaped dynamics of spending to an inflation shock. The model also addresses two important policy questions: allowing the monetary authority to respond to asset prices yields negligible gains in terms of output and inflation stabilization. Second, nominal (vis-à-vis indexed) debt yields an improved output-inflation variance trade-off for the central bank. The paper concludes that the model is consistent with key business cycle facts and can be used for policy analysis. The model's transmission mechanism is consistent with the data, and the model's ability to reflect short-run dynamic properties is especially important given that several studies have stressed the role of non-technology and non-monetary disturbances for understanding business fluctuations.The paper explores the role of house prices, borrowing constraints, and monetary policy in business cycles. It develops and estimates a monetary business cycle model with nominal loans and collateral constraints tied to housing values. The model shows that demand shocks affect both housing and nominal prices, and these shocks are amplified and propagated over time. The financial accelerator is not uniform: nominal debt dampens supply shocks, stabilizing the economy under interest rate control. Structural estimation supports two key model features: collateral effects dramatically improve the response of aggregate demand to house price shocks; nominal debt improves the sluggish response of output to inflation surprises. Policy evaluation considers the role of house prices and debt indexation in affecting monetary policy trade-offs. The model incorporates a financial accelerator mechanism where endogenous variations in the balance sheet of firms generate a "financial accelerator" by enhancing the amplitude of business cycles. The model includes collateral constraints tied to real estate values for firms and a subset of households, as well as nominal debt. The model's transmission mechanism works as follows: a positive demand shock leads to increased consumer and asset prices, which increases the borrowing capacity of debtors, allowing them to spend and invest more. The rise in consumer prices reduces the real value of their outstanding debt obligations, positively affecting their net worth. Given that borrowers have a higher propensity to spend than lenders, the net effect on demand is positive, acting as a powerful amplification mechanism. However, while it amplifies demand shocks, consumer price inflation dampens the shocks that induce a negative correlation between output and inflation. The model successfully explains two key features of the data: a positive response of spending to a house price shock and a hump-shaped dynamics of spending to an inflation shock. The model also addresses two important policy questions: allowing the monetary authority to respond to asset prices yields negligible gains in terms of output and inflation stabilization. Second, nominal (vis-à-vis indexed) debt yields an improved output-inflation variance trade-off for the central bank. The paper concludes that the model is consistent with key business cycle facts and can be used for policy analysis. The model's transmission mechanism is consistent with the data, and the model's ability to reflect short-run dynamic properties is especially important given that several studies have stressed the role of non-technology and non-monetary disturbances for understanding business fluctuations.