Housing, Monetary Policy, and the Recovery

101 Pages Posted: 11 May 2012 Last revised: 6 Sep 2012

Michael Feroli

affiliation not provided to SSRN

Ethan S. Harris

Bank of America

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)

Date Written: September 5, 2012

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.

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: https://ssrn.com/abstract=2056313 or http://dx.doi.org/10.2139/ssrn.2056313

Michael Feroli

affiliation not provided to SSRN

Ethan S. Harris

Bank of America ( email )

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) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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