Should the central bank be concerned about housing prices?

Karsten Jeske and Zheng Liu

No 2010-05, Working Paper Series from Federal Reserve Bank of San Francisco

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.

Keywords: Housing - Prices; Monetary policy; Inflation targeting (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-ure
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Journal Article: SHOULD THE CENTRAL BANK BE CONCERNED ABOUT HOUSING PRICES? (2013)
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