Forward Guidance Effectiveness in a New Keynesian Model with Housing Frictions

Cole Stephen J. () and Huh Sungjun ()
Additional contact information
Cole Stephen J.: Department of Economics, Marquette University, P.O. Box 1881, Milwaukee 53201, WI, USA
Huh Sungjun: Department of Economics, Konkuk University, 634 Sanghuh Research Building, 120 Neungdong-Ro, Gwangjin-Gu, Seoul 05029, South Korea

The B.E. Journal of Macroeconomics, 2023, vol. 23, issue 1, 551-590

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 shocks generate welfare gains, though the magnitude of these gains declines 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, M., M. P. Giannoni, and C. Patterson (2012. “The Forward Guidance Puzzle.” In FRB of New York Staff Report, 574). Thus, policymakers should consider housing frictions when examining the effects of forward guidance on the economy.

Keywords: forward guidance; financial frictions; housing collateral; zero lower bound (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 R21 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/bejm-2021-0197

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