Leaning Against Housing Prices As Robustly Optimal Monetary Policy

67 Pages Posted: 19 Nov 2018

See all articles by Klaus Adam

Klaus Adam

University of Mannheim; European Central Bank (ECB) - Department of Research; Centre for Economic Policy Research (CEPR)

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: May 15, 2018

Abstract

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.

JEL Classification: D81, D84, E52

Suggested Citation

Adam, Klaus and Woodford, Michael, Leaning Against Housing Prices As Robustly Optimal Monetary Policy (May 15, 2018). CFS Working Paper, No. 601, 2018. Available at SSRN: https://ssrn.com/abstract=3274338 or http://dx.doi.org/10.2139/ssrn.3274338

Klaus Adam (Contact Author)

University of Mannheim ( email )

Department of Economics
L7 ,3-5
Mannheim, 68131
Germany

HOME PAGE: http://adam.vwl.uni-mannheim.de/1528.0.html

European Central Bank (ECB) - Department of Research ( email )

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Frankfurt am Main, 60314
Germany
+49 69 1344 6597 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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