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Should the central bank be concerned about housing prices?

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  • Karsten Jeske
  • Zheng Liu

Abstract

Housing 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.

Suggested Citation

  • Karsten Jeske & Zheng Liu, 2010. "Should the central bank be concerned about housing prices?," Working Paper Series 2010-05, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2010-05
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    Cited by:

    1. Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Scientific Monographs, Bank of Finland, number 2012_047, December.
    2. Cantelmo, Alessandro & Melina, Giovanni, 2018. "Monetary policy and the relative price of durable goods," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 1-48.
    3. Alessandro Notarpietro & Stefano Siviero, 2015. "Optimal Monetary Policy Rules and House Prices: The Role of Financial Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 383-410, March.

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    Keywords

    Housing - Prices ; Monetary policy ; Inflation targeting;

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