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Housing, Monetary Policy, and the Recovery


Michael Feroli


affiliation not provided to SSRN

Ethan S. Harris


affiliation not provided to SSRN

Amir Sufi


University of Chicago - Booth School of Business; NBER

Kenneth D. West


University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

September 5, 2012

Chicago Booth Research Paper No. 12-16

Abstract:     
While the economy shows signs of strength, the recovery remains tepid relative to economic upswings following deep recessions of the past. This weakness has occurred despite an aggressive monetary response by the Federal Reserve which has adopted even unconventional tools to reduce long term interest rates. A variety of factors have been blamed for the tepid recovery, including the financial crisis of 2008, uncertainty over policy, and high levels of indebtedness.

In this report, we focus on weakness in housing. Our analysis makes two broad points. First, weakness in housing and residential investment is a main impediment to a robust recovery. Second, problems related to housing have affected the transmission of monetary policy. More specifically, the unprecedented decline in house prices and residential investment has introduced headwinds that may require a more aggressive monetary response than in normal downturns. Further, problems related to housing markets may reduce the sensitivity of real economic activity to the interest rates that monetary policy can affect. Or in the parlance of textbook intermediate macroeconomics, housing problems have likely shifted the IS curve leftwards and steepened the slope of the curve by introducing a gap between policy rates and effective rates. For both of these reasons, problems related to housing introduce significant challenges to monetary policy-making.

Number of Pages in PDF File: 101

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Date posted: May 11, 2012 ; Last revised: September 6, 2012

Suggested Citation

Feroli, Michael and Harris, Ethan S. and Sufi, Amir and West, Kenneth D., Housing, Monetary Policy, and the Recovery (September 5, 2012). Chicago Booth Research Paper No. 12-16. Available at SSRN: http://ssrn.com/abstract=2056313 or http://dx.doi.org/10.2139/ssrn.2056313

Contact Information

Michael Feroli
affiliation not provided to SSRN
Ethan S. Harris
affiliation not provided to SSRN ( email )
No Address Available
Amir Sufi (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
NBER
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Kenneth D. West
University of Wisconsin - Madison - Department of Economics ( email )
1180 Observatory Drive
Madison, WI 53706
United States
608-262-0033 (Phone)
608-262-2033 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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