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The aggregate and heterogeneous effects of responding to shelter inflation

Author

Listed:
  • Michael Irwin
  • Matías Vieyra

Abstract

This note examines how monetary policy responses to shelter inflation affect both the overall economy and different households. We find that the aggregate macroeconomic effects of responding to shelter inflation are modest, whereas the redistributive consequences across households are substantially larger. Renters and homeowners differ sharply in their preferences over whether the central bank should react to elevated shelter inflation. Finally, mortgage interest cost (MIC) inflation responds mechanically to changes in interest rates. As a result, a monetary policy that reacts to these inflation movements generates an endogenous feedback loop, producing undesirable oscillations in consumption and output.

Suggested Citation

  • Michael Irwin & Matías Vieyra, 2026. "The aggregate and heterogeneous effects of responding to shelter inflation," Staff Analytical Papers 2026-5, Bank of Canada.
    • Handle: RePEc:bca:bocsap:26-5
    DOI: 10.34989/sap-2026-5
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    Keywords

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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G5 - Financial Economics - - Household Finance

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