Leaning against housing prices as robustly optimal monetary policy

  • We analytically characterize optimal monetary policy for an augmented New Keynesian model with a housing sector. In a setting where the private sector has rational expectations about future housing prices and inflation, optimal monetary policy can be characterized without making reference to housing price developments: commitment to a 'target criterion' that refers to inflation and the output gap only is optimal, as in the standard model without a housing sector. When the policymaker is concerned with potential departures of private sector expectations from rational ones and seeks to choose a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. In the empirically realistic case where housing is subsidized and where monopoly power causes output to fall short of its optimal level, the robustly optimal target criterion requires the central bank to 'lean against' housing prices: following unexpected housing price increases, policy should adopt a stance that is projected to undershoot its normal targets for inflation and the output gap, and similarly aim to overshoot those targets in the case of unexpected declines in housing prices. The robustly optimal target criterion does not require that policy distinguish between 'fundamental' and 'non-fundamental' movements in housing prices.

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Metadaten
Author:Klaus AdamORCiDGND, Michael Woodford
URN:urn:nbn:de:hebis:30:3-473482
URL:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3274338
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 601
Series (Serial Number):CFS working paper series (601)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2018
Year of first Publication:2018
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2018/11/02
Issue:May 15, 2018
Page Number:67
HeBIS-PPN:439736390
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universit├Ątspublikationen
Licence (German):License LogoDeutsches Urheberrecht