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House Price Expectations and Inflation Expectations: Evidence from Survey Data

Author

Listed:
  • Vedanta Dhamija

    (University of Surrey)

  • Ricardo Nunes

    (University of Surrey
    Centre for International Macroeconomic Studies (CIMS)
    Centre for Macroeconomics (CFM))

  • Roshni Tara

    (University of Surrey)

Abstract

We find that households tend to overweight house price expectations when forming their inflation expectations. The finding is robust across several specifications and two survey data sets for the United States. We also find that there is a significant effect of the cognitive abilities of households as more sophisticated households don’t overweight house price inflation as much. We model this household behaviour in a two-sector New Keynesian model with an overweighted and a non-overweighted sector and analytically derive a welfare loss function consistent with the micro-foundations of the model. In this setup, we show that to gauge the correct interest rate response, the central bank needs to be aware that some sectors are overweighted and that movements in expected inflation in such sectors are important for monetary policy.

Suggested Citation

  • Vedanta Dhamija & Ricardo Nunes & Roshni Tara, 2023. "House Price Expectations and Inflation Expectations: Evidence from Survey Data," Discussion Papers 2318, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2318
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    More about this item

    Keywords

    Salience; Inflation Expectations; House Price Expectations; Monetary Policy;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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