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Forward Guidance Effectiveness in a New Keynesian Model with Housing Frictions

Author

Listed:
  • Cole Stephen J.

    (Department of Economics, Marquette University, P.O. Box 1881, Milwaukee, 53201, WI, USA)

  • Huh Sungjun

    (Department of Economics, Konkuk University, 634 Sanghuh Research Building, 120 Neungdong-Ro, Gwangjin-Gu, Seoul, 05029, South Korea)

Abstract

Housing markets are closely related to monetary policy. This paper studies the link between housing frictions and the effectiveness of forward guidance. A housing collateral constraint and forward guidance shocks are incorporated into a standard medium-scale New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. Our main results produce a number of important implications. First, financial frictions emanating from the housing market dampen the effectiveness of forward guidance on the economy. Second, forward guidance shocks generate welfare gains, though the magnitude of these gains declines when housing frictions increase. Housing frictions also attenuate the effect of forward guidance at the zero lower bound. Finally, this article provides a solution to “forward guidance puzzle” of Del Negro, M., M. P. Giannoni, and C. Patterson (2012. “The Forward Guidance Puzzle.” In FRB of New York Staff Report, 574). Thus, policymakers should consider housing frictions when examining the effects of forward guidance on the economy.

Suggested Citation

  • Cole Stephen J. & Huh Sungjun, 2023. "Forward Guidance Effectiveness in a New Keynesian Model with Housing Frictions," The B.E. Journal of Macroeconomics, De Gruyter, vol. 23(1), pages 551-590, January.
    • Handle: RePEc:bpj:bejmac:v:23:y:2023:i:1:p:551-590:n:9
    DOI: 10.1515/bejm-2021-0197
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    More about this item

    Keywords

    forward guidance; financial frictions; housing collateral; zero lower bound;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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