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Robustly Optimal Monetary Policy in a New Keynesian Model with Housing

Author

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  • Klaus Adam
  • Michael Woodford
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.

Suggested Citation

  • Klaus Adam & Michael Woodford, 2020. "Robustly Optimal Monetary Policy in a New Keynesian Model with Housing," NBER Working Papers 26833, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26833
    Note: ME
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    References listed on IDEAS

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    Cited by:

    1. Karantounias, Anastasios G., 2023. "Doubts about the model and optimal policy," Journal of Economic Theory, Elsevier, vol. 210(C).
    2. Charles Ka Yui LEUNG, 2022. "Housing and Macroeconomics," ISER Discussion Paper 1197, Institute of Social and Economic Research, Osaka University.
    3. Buch, Claudia M. & Eickmeier, Sandra & Prieto, Esteban, 2022. "Banking deregulation, macroeconomic dynamics and monetary policy," Journal of Financial Stability, Elsevier, vol. 63(C).
    4. Klaus Adam & Oliver Pfäuti & Timo Reinelt, 2020. "Falling Natural Rates, Rising Housing Volatility and the Optimal Inflation Target," CRC TR 224 Discussion Paper Series crctr224_2020_235, University of Bonn and University of Mannheim, Germany.
    5. Jørgensen, Peter Lihn, 2023. "The global savings glut and the housing boom," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    6. Thore Kockerols & Erling Motzfeldt Kravik & Yasin Mimir, 2021. "Leaning against persistent financial cycles with occasional crises," Working Paper 2021/11, Norges Bank.
    7. Ciccarelli, Matteo & Darracq Pariès, Matthieu & Priftis, Romanos & Angelini, Elena & Bańbura, Marta & Bokan, Nikola & Fagan, Gabriel & Gumiel, José Emilio & Kornprobst, Antoine & Lalik, Magdalena & Mo, 2024. "ECB macroeconometric models for forecasting and policy analysis," Occasional Paper Series 344, European Central Bank.
    8. Yasutaka Ogawa & Jiro Yoshida, 2024. "Aging, Housing, and Macroeconomic Inefficiency," IMES Discussion Paper Series 24-E-04, Institute for Monetary and Economic Studies, Bank of Japan.

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    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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