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Learning, monetary policy and housing prices

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  • KANIK, Birol

Abstract

This paper evaluates different types of simple monetary policy rules according to the determinacy and learnability of rational expectations equilibrium criteria within a dynamic stochastic general equilibrium framework. Incorporating housing prices and collateralized borrowing into the standard model allow us to answer important policy questions. One objective is to investigate whether responding to housing prices affects determinacy and learnability of rational expectations equilibrium. For this purpose, we work with a New Keynesian model in which housing plays an accelerator role in business cycles as a collateralized asset. The results show that for current data rule, responding to asset prices does not improve learnable outcomes but for a monetary policy with lagged data and forward-looking rules we see improved learnable outcome if current housing prices are available to monetary authority. Moreover, we examine the effects of interest rate inertia and price stickiness on E-stability of REE.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35782.

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Date of creation: 25 Mar 2011
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Handle: RePEc:pra:mprapa:35782

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Keywords: monetary policy rules; determinacy; learning; housing prices;

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  1. L.J. Christiano & C.J. Gust, 1999. "Taylor Rules in a Limited Participation Model," DNB Staff Reports (discontinued), Netherlands Central Bank 33, Netherlands Central Bank.
  2. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(4), pages 653-84, November.
  3. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, Elsevier, vol. 35(2), pages 245-274, April.
  4. Charles T. Carlstrom & Timothy S. Fuerst, 2004. "Asset prices, nominal rigidities, and monetary policy," Working Paper 0413, Federal Reserve Bank of Cleveland.
  5. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, University of Manchester, vol. 67(0), pages 1-35, Supplemen.
  6. Edward E. Leamer, 2007. "Housing is the business cycle," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 149-233.
  7. Woodford Michael, 2002. "Inflation Stabilization and Welfare," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 2(1), pages 1-53, February.
  8. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  9. James Bullard & Kaushik Mitra, . "Determinacy, Learnability, and Monetary Policy Inertia," Discussion Papers, Department of Economics, University of York 00/43, Department of Economics, University of York.
  10. Benhabib, Jess & Nishimura, Kazuo, 1998. "Indeterminacy and Sunspots with Constant Returns," Journal of Economic Theory, Elsevier, Elsevier, vol. 81(1), pages 58-96, July.
  11. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers, Federal Reserve Bank of St. Louis 2000-001, Federal Reserve Bank of St. Louis.
  12. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
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