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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)

  • Huh, Sungjun

    (Department of Economics Marquette University)

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 has asymmetric effects on the welfare of lenders and borrowers 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 et al. (2012). Thus, policymakers should consider housing frictions when examining the effects of forward guidance on the economy.

Suggested Citation

  • Cole, Stephen J. & Huh, Sungjun, 2021. "Forward Guidance Effectiveness in a New Keynesian Model with Housing Frictions," Working Papers and Research 2021-07, Marquette University, Center for Global and Economic Studies and Department of Economics.
  • Handle: RePEc:mrq:wpaper:2021-07
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    File URL: https://epublications.marquette.edu/econ_workingpapers/80
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    More about this item

    Keywords

    forward guidance; financial frictions; housing collateral; zero lower ground;
    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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