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The role of liquidity constraints in the response of monetary policy to house prices

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  • Kajuth, Florian

Abstract

We analyse the optimal response of monetary policy to house prices in a New Keynesian framework. A positive wealth effect from housing is derived from liquidity constrained consumers. Housing equity withdrawal allows them to convert an increase in housing value into consumption and we show that monetary policy should react to house prices due to their effect on consumption by constrained agents. Moreover, we allow the share of liquidity constrained consumers to vary with house prices. Consequently, the optimal weights on expected inflation, the output gap and house prices in the optimal interest rate rule vary over time too.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 6 (2010)
Issue (Month): 4 (December)
Pages: 230-242

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Handle: RePEc:eee:finsta:v:6:y:2010:i:4:p:230-242

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Web page: http://www.elsevier.com/locate/jfstabil

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Keywords: Optimal monetary policy Liquidity constraints House prices;

References

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Cited by:
  1. John C. Williams, 2011. "Monetary policy in an era of crises," Speech 93, Federal Reserve Bank of San Francisco.
  2. Zeng, Jhih-Hong & Peng, Chi-Lu & Chen, Ming-Chi & Lee, Chien-Chiang, 2013. "Wealth effects on the housing markets: Do market liquidity and market states matter?," Economic Modelling, Elsevier, vol. 32(C), pages 488-495.

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