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Robustly Optimal Monetary Policy in a New Keynesian Model with Housing

Klaus Adam () and Michael Woodford ()

No 26833, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analytically characterize optimal monetary policy for an augmented New Keynesian 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” in terms of inflation and the output gap, that makes no reference to housing prices. If instead 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 will also depend on housing prices. For empirically realistic cases, robustness requires the central bank to “lean against” housing prices, i.e., to adopt a stance that is projected to undershoot (overshoot) its normal targets for inflation and the output gap following unexpected housing price increases (decreases). Notably, robustly optimal policy does not require that the central bank distinguish between “fundamental” and “non-fundamental” movements in housing prices.

JEL-codes: C61 E52 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: ME
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Working Paper: Robustly Optimal Monetary Policy in a New Keynesian Model With Housing (2020) Downloads
Working Paper: Robustly Optimal Monetary Policy in a New Keynesian Model with Housing (2020) Downloads
Working Paper: Robustly Optimal Monetary Policy in a New Keynesian Model with Housing (2020) Downloads
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