Hostname: page-component-cd9895bd7-gbm5v Total loading time: 0 Render date: 2024-12-28T03:43:37.106Z Has data issue: false hasContentIssue false
  • English
  • Français

SHOULD THE CENTRAL BANK BE CONCERNED ABOUT HOUSING PRICES?

Published online by Cambridge University Press:  23 January 2012

Karsten Jeske  and
Zheng Liu
Karsten Jeske
Affiliation:
Mellon Capital Management
Zheng Liu*
Affiliation:
Federal Reserve Bank of San Francisco
*
Address correspondence to: Zheng Liu, Federal Reserve Bank of San Francisco, 101 Market Street, MS 1130, San Francisco, CA 94105, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

Housing is an important component of the consumption basket. Because both rental prices and goods prices are sticky, the literature suggests that optimal monetary policy should stabilize both types of prices, with the optimal weight on rental inflation proportional to the housing expenditure share. In a two-sector DSGE model with sticky rental prices and goods prices, however, we find that the optimal weight on rental inflation in the Taylor rule is small—much smaller than that implied by the housing expenditure share. We show that the asymmetry in policy responses to rent inflation versus goods inflation stems from the asymmetry in factor intensity between the two sectors.

Keywords

Optimal Monetary PolicyHousing PricesInflation TargetingTaylor RuleFactor Intensity
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 1 , January 2013 , pp. 29 - 53
Copyright
Copyright © Cambridge University Press 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Altig, D., Christiano, L.J., Eichenbaum, M., and Linde, J. (2011) Firm-specific capital, nominal rigidities and the business cycle. Review of Economic Dynamics 14, 225–247.CrossRefGoogle Scholar
Aoki, K. (2001) Optimal monetary policy responses to relative price changes. Journal of Monetary Economics 48, 55–80.CrossRefGoogle Scholar
Barsky, R.B., House, C.L., and Kimball, M.S. (2007) Sticky-price models and durable goods. American Economic Review 97, 984–998.CrossRefGoogle Scholar
Benigno, P. (2004) Optimal monetary policy in a currency area. Journal of International Economics 63, 293–320.CrossRefGoogle Scholar
Bils, M. and Klenow, P.J. (2004) Some evidence on the importance of sticky prices. Journal of Political Economy 112 (5), 947–985.CrossRefGoogle Scholar
Blanchard, O.J. and Gali, J. (2007) Real wage rigidities and the New Keynesian model. Journal of Money, Credit and Banking 39, 35–66.CrossRefGoogle Scholar
Calvo, G. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12 (3), 383–398.CrossRefGoogle Scholar
Chari, V., Kehoe, P.J., and McGrattan, E.R. (2000) Sticky price models of the business cycle: Can the contract multiplier solve the persistence problem? Econometrica 68 (5), 1151–1180.CrossRefGoogle Scholar
Christiano, L., Eichenbaum, M., and Evans, C. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113 (1), 1–45.CrossRefGoogle Scholar
Clarida, R., Gal, J., and Gertler, M. (2000) Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115 (1), 147–180.CrossRefGoogle Scholar
Davis, M.A. and Heathcote, J. (2005) Housing and the business cycle. International Economic Review 46 (3), 751–784.CrossRefGoogle Scholar
Erceg, C., Henderson, D., and Levin, A. (2000) Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46, 281–313.CrossRefGoogle Scholar
Erceg, C. and Levin, A. (2006) Optimal monetary policy with durable consumption goods. Journal of Monetary Economics 53, 1341–1359.CrossRefGoogle Scholar
Eusepi, S., Hobijn, B., and Tambalotti, A. (2011) CONDI: A Cost-of-Nominal-Distortions Index. American Economic Journal: Macroeconomics 3, 53–91.Google Scholar
Genesove, D. (2003) The nominal rigidity of apartment rents. Review of Economics and Statistics 85 (4), 844–853.CrossRefGoogle Scholar
Goodfriend, M. and King, R.G. (1997) The new neoclassical synthesis and the role of monetary policy. NBER Macroeconomics Annual 12, 231–296.CrossRefGoogle Scholar
Huang, K. and Liu, Z. (2002) Staggered price-setting, staggered wage-setting, and business cycle persistence. Journal of Monetary Economics 49 (2), 405–433.CrossRefGoogle Scholar
Huang, K. and Liu, Z. (2005) Inflation targeting: What inflation rate to target? Journal of Monetary Economics 52 (8), 1435–1462.CrossRefGoogle Scholar
King, R.G. and Wolman, A.L. (1999) What should the monetary authority do when prices are sticky? In Taylor, John B. (ed.), Monetary Policy Rules. Chicago: University of Chicago Press.Google Scholar
Kiyotaki, N. and Moore, J. (1997) Credit cycles. Journal of Political Economy 105 (2), 211–248.CrossRefGoogle Scholar
Liu, Z. and Pappa, E. (2008) Gains from international monetary policy coordination: Does it pay to be different? Journal of Economic Dynamics and Control 32, 2085–2117.CrossRefGoogle Scholar
Liu, Z., Wang, P., and Zha, T. (2009) Do Credit Constraints Amplify Macroeconomic Fluctuations? Federal Reserve Bank of San Francisco working paper 2009-28.Google Scholar
Lombardo, G. (2006) Inflation targeting rules and welfare in an asymmetric currency area. Journal of International Economics 68 (2), 424–442.CrossRefGoogle Scholar
Lubik, T.A. and Schorfheide, F. (2004) Testing for indeterminacy: An application to U.S. monetary policy. American Economic Review 94 (1), 190–219.CrossRefGoogle Scholar
Mankiw, N.G. and Reis, R. (2003) What measure of inflation should a central bank target? Journal of the European Economic Association 1, 1058–1086.CrossRefGoogle Scholar
Nakamura, E. and Steinsson, J. (2008) Five facts about prices: A reevaluation of menu cost models. Quarterly Journal of Economics 123, 1415–1464.CrossRefGoogle Scholar
Pencavel, J.H. (1986) Labor supply of men: A survey. In Ashenfelter, O.C. and Layard, R. (eds.), Handbook of Labor Economics, pp. 3–102. Amsterdam: Elsevier Sciences.CrossRefGoogle Scholar
Rotemberg, J.J. and Woodford, M. (1999) Interest rate rules in an estimated sticky price model. In Taylor, John B. (ed.), Monetary Policy Rules, pp. 57–119. Chicago: University of Chicago Press.Google Scholar
Sutherland, A. (2002) A Simple Second-Order Solution Method for Dynamic General Equilibrium Models. CEPR discussion paper 3554.Google Scholar
Woodford, M. (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar