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Robustly Optimal Monetary Policy in a New Keynesian Model With Housing

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  • Klaus Adam
  • Michael Woodford

Abstract

We analytically characterize optimal monetary policy for an augmented New Keyne- sian model with a housing sector. With rational private sector expectations about housing prices and inflation, optimal monetary policy can be characterized by a standard 'target criterion' that refers to inflation and the output gap, without making reference to housing prices. When the policymaker is concerned with potential departures of private sector expectations from rational ones and seeks a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. For empirically realistic cases, the central bank should then 'lean against' housing prices, i.e., following unexpected housing price increases (decreases), policy should adopt a stance that is projected to undershoot (overshoot) its normal targets for inflation and the output gap. Robustly optimal policy does not require that the central bank distinguishes between 'fundamental' and 'non-fundamental' movements in housing prices.

Suggested Citation

  • Klaus Adam & Michael Woodford, 2020. "Robustly Optimal Monetary Policy in a New Keynesian Model With Housing," CRC TR 224 Discussion Paper Series crctr224_2020_154, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2020_154
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    Cited by:

    1. Karantounias, Anastasios G., 2023. "Doubts about the model and optimal policy," Journal of Economic Theory, Elsevier, vol. 210(C).
    2. Jørgensen, Peter Lihn, 2023. "The global savings glut and the housing boom," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    3. Vedanta Dhamija & Ricardo Nunes & Roshni Tara, 2023. "House Price Expectations and Inflation Expectations: Evidence from Survey Data," School of Economics Discussion Papers 0823, School of Economics, University of Surrey.
    4. Thore Kockerols & Erling Motzfeldt Kravik & Yasin Mimir, 2021. "Leaning against persistent financial cycles with occasional crises," Working Paper 2021/11, Norges Bank.
    5. Charles Ka Yui LEUNG, 2022. "Housing and Macroeconomics," ISER Discussion Paper 1197, Institute of Social and Economic Research, The University of Osaka.
    6. Elisa Guglielminetti & Michele Loberto, 2025. "Inflation expectations and price-setting decisions: insights from the housing market," Temi di discussione (Economic working papers) 1507, Bank of Italy, Economic Research and International Relations Area.
    7. Abdelkader Aguir & Nesrine Dardouri, 2025. "What Can We Learn About the Monetary Policy Transmission Mechanism? Evidence from a Peripheral Country After a Political Revolution and COVID-19," Economies, MDPI, vol. 13(10), pages 1-22, September.
    8. Buch, Claudia M. & Eickmeier, Sandra & Prieto, Esteban, 2022. "Banking deregulation, macroeconomic dynamics and monetary policy," Journal of Financial Stability, Elsevier, vol. 63(C).
    9. Abdelkader Aguir & Nesrine Dardouri, 2025. "What Can We Learn About the Monetary Policy Transmission Mechanism? Evidence from a Peripheral Country After a Political Revolution and COVID-19," Post-Print hal-05290329, HAL.
    10. Ulrich Roschitsch & Hannes Twieling, 2025. "United in Booms, Divided in Busts: Regional House Price Cycles and Monetary Policy," Staff Working Papers 25-36, Bank of Canada.
    11. Klaus Adam & Oliver Pfäuti & Timo Reinelt, 2020. "Falling Natural Rates, Rising Housing Volatility and the Optimal Inflation Target," CRC TR 224 Discussion Paper Series crctr224_2020_235, University of Bonn and University of Mannheim, Germany.
    12. von Schweinitz, Gregor, 2023. "The importance of credit demand for business cycle dynamics," IWH Discussion Papers 21/2023, Halle Institute for Economic Research (IWH).
    13. Ciccarelli, Matteo & Darracq Pariès, Matthieu & Priftis, Romanos & Angelini, Elena & Bańbura, Marta & Bokan, Nikola & Fagan, Gabriel & Gumiel, José Emilio & Kornprobst, Antoine & Lalik, Magdalena & Mo, 2024. "ECB macroeconometric models for forecasting and policy analysis," Occasional Paper Series 344, European Central Bank.
    14. Adam, Klaus & Pfäuti, Oliver & Reinelt, Timo, 2025. "Subjective housing price expectations, falling natural rates, and the optimal inflation target," Journal of Monetary Economics, Elsevier, vol. 149(C).
    15. Yasutaka Ogawa & Jiro Yoshida, 2024. "Aging, Housing, and Macroeconomic Inefficiency," IMES Discussion Paper Series 24-E-04, Institute for Monetary and Economic Studies, Bank of Japan.

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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