Should the central bank be concerned about housing prices?
AbstractHousing is an important component of the consumption basket. Since both rental prices and goods prices are sticky, the literature suggests that optimal monetary policy should stabilize both types of prices, with the optimal weight on rental inflation proportional to the housing expenditure share. In a two-sector DSGE model with sticky rental prices and goods prices, however, we find that the optimal weight on rental inflation in the Taylor rule is small—much smaller than that implied by the housing expenditure share. Since production of housing services uses the stocks of housing intensively, large fluctuations in the price of housing stocks lead to large adjustments in reset rental prices. This weak strategic complementarity in rental price setting calls for a small optimal weight on rental price inflation.
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Bibliographic InfoPaper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2010-05.
Date of creation: 2010
Date of revision:
Other versions of this item:
- Jeske, Karsten & Liu, Zheng, 2013. "Should The Central Bank Be Concerned About Housing Prices?," Macroeconomic Dynamics, Cambridge University Press, vol. 17(01), pages 29-53, January.
- NEP-ALL-2010-03-20 (All new papers)
- NEP-CBA-2010-03-20 (Central Banking)
- NEP-DGE-2010-03-20 (Dynamic General Equilibrium)
- NEP-MON-2010-03-20 (Monetary Economics)
- NEP-URE-2010-03-20 (Urban & Real Estate Economics)
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- Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Scientific Monographs E:47/2012, Bank of Finland.
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