A Tale of Two Inflation Rates: Hous e-Price Inflation and Monetary Policy
Abstract:
Price stability should be the ultimate goal of monetary policy, but which of many money prices sho uld a central bank stabilize? A common argument is that the consumer price index should be stabilized because goods prices are sticky, with this being the key friction that monetary policy should mitigate. This paper presents a heterogeneous-agent, incomplete-markets model where households buy and s ell houses over their lifetimes with purchases financed by nominal mortgage debt. The model includes aggregate risk from productivity shocks as well a s financial shocks to borrowing constraints. The model generates a “financi al cycle” where shocks that affect nominal house prices have real effects o n balance sheets and lending, which feeds back into house prices. As a cons equence, house-price fluctuations have implications for consumption volatil ity, as well as production. In this context, it is argued that the price st ability central banks should seek is stability of nominal house prices. Ach ieving this improves risk sharing, promotes productive efficiency, and avoi ds bubbles. Moreover, by considering an additional “macroprudential” policy instrument, it is shown that interest-rate policy outperforms macroprudent ial policy in addressing financial stability concerns.
DTSTAMP:20260404T022150Z DTSTART:20151123T173000Z DTEND:20151123T190000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR