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SHOULD THE CENTRAL BANK BE CONCERNED ABOUT HOUSING PRICES?

Published online by Cambridge University Press:  23 January 2012

Karsten Jeske  and
Zheng Liu
Karsten Jeske
Affiliation:
Mellon Capital Management
Zheng Liu*
Affiliation:
Federal Reserve Bank of San Francisco
*
Address correspondence to: Zheng Liu, Federal Reserve Bank of San Francisco, 101 Market Street, MS 1130, San Francisco, CA 94105, USA; e-mail: Zheng.Liu@sf.frb.org.
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Abstract

Housing is an important component of the consumption basket. Because 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. We show that the asymmetry in policy responses to rent inflation versus goods inflation stems from the asymmetry in factor intensity between the two sectors.

Keywords

Optimal Monetary PolicyHousing PricesInflation TargetingTaylor RuleFactor Intensity
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 1 , January 2013 , pp. 29 - 53
Copyright
Copyright © Cambridge University Press 2012

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