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Author: Shihan Xie Publisher: ISBN: Category : Languages : en Pages : 119
Book Description
Monetary policy in the U.S. has changed substantially in the past few decades. This thesis seeks to understand the effects of monetary policy through household expectations and housing prices. The first chapter proposes and estimates a dynamic model of household inflation expectations. The information flow constraint of the household leads to costly information monitoring. Households use a Bayesian learning model to form and update inflation expectations. The model identifies and corrects for sizable reporting and sampling errors prevalent in household surveys. The estimates show that better-educated households track inflation more closely and report their expectations more accurately. Household inflation expectations are less responsive to changes in the inflation target after the Great Recession. Model-implied household inflation expectations improve the fit of the expectation-augmented Phillips curve. Inattention from households makes it costlier for the Fed to lower inflation than would be the case if everyone is perfectly informed. The second chapter examines the differential effect of monetary policy shocks on U.S. local housing markets. By exploiting the heterogeneity in housing supply elasticity, I provide estimates of local housing price responses to monetary policy shocks in a large sample of metropolitan statistical areas. Given an expansionary shock that decreases the Federal Funds rate by 100 basis points, housing prices increase by 7.2% in cities with a highly inelastic housing supply (e.g., San Francisco), but by only 1.0% in cities with a very elastic housing supply (e.g., Iowa City) at the two-year horizon. To understand the monetary policy transmission mechanism in the housing market, I develop and estimate a structural model of the housing price with information friction. The third chapter surveys a number of important methods on the identification of monetary policy shocks and compares their estimated impacts on output, inflation and unemployment rate for pre- and post-1984 periods. In particular, identification using monetary SVAR or Romer-Romer method suggests substantial changes in the effects of monetary policy shocks. In contrast, the FAVAR method provides relatively consistent estimation for both periods. Tests for structural breaks point to parameter instability during 1979-1984. Such instability persists after accounting for GARCH effects.
Author: Shihan Xie Publisher: ISBN: Category : Languages : en Pages : 119
Book Description
Monetary policy in the U.S. has changed substantially in the past few decades. This thesis seeks to understand the effects of monetary policy through household expectations and housing prices. The first chapter proposes and estimates a dynamic model of household inflation expectations. The information flow constraint of the household leads to costly information monitoring. Households use a Bayesian learning model to form and update inflation expectations. The model identifies and corrects for sizable reporting and sampling errors prevalent in household surveys. The estimates show that better-educated households track inflation more closely and report their expectations more accurately. Household inflation expectations are less responsive to changes in the inflation target after the Great Recession. Model-implied household inflation expectations improve the fit of the expectation-augmented Phillips curve. Inattention from households makes it costlier for the Fed to lower inflation than would be the case if everyone is perfectly informed. The second chapter examines the differential effect of monetary policy shocks on U.S. local housing markets. By exploiting the heterogeneity in housing supply elasticity, I provide estimates of local housing price responses to monetary policy shocks in a large sample of metropolitan statistical areas. Given an expansionary shock that decreases the Federal Funds rate by 100 basis points, housing prices increase by 7.2% in cities with a highly inelastic housing supply (e.g., San Francisco), but by only 1.0% in cities with a very elastic housing supply (e.g., Iowa City) at the two-year horizon. To understand the monetary policy transmission mechanism in the housing market, I develop and estimate a structural model of the housing price with information friction. The third chapter surveys a number of important methods on the identification of monetary policy shocks and compares their estimated impacts on output, inflation and unemployment rate for pre- and post-1984 periods. In particular, identification using monetary SVAR or Romer-Romer method suggests substantial changes in the effects of monetary policy shocks. In contrast, the FAVAR method provides relatively consistent estimation for both periods. Tests for structural breaks point to parameter instability during 1979-1984. Such instability persists after accounting for GARCH effects.
Author: Min-Ho Nam Publisher: ISBN: Category : Housing Languages : en Pages : 398
Book Description
This thesis, motivated by my reflections about the failings of monetary policy implementation as a cause of the sub-prime crisis, attempts to answer the following inquiries: (i) whether interest rates have played a major role in generating the house price fluctuations in the U.S., (ii) what are the effects of accommodative monetary policy on the economy given banks' excessive risk-taking, and (iii) whether an optimal monetary policy rule can be found for curbing credit-driven economic volatilities in the model economy with unconventional transmission channels operating. By using a decomposition technique and regression analysis, it can be shown that short-term interest rates exert the most potent influence on the evolution of the volatile components of housing prices. One possible explanation for this is that low policy rates for a prolonged period tend to encourage bankers to take on more risk in lending. This transmission channel, labelled as the risk-taking channel, accounts for the gap to some extent between the forecast and the actual impact of monetary policy on the housing market and the overall economy. A looser monetary policy stance can also shift the preference of economic agents toward housing as theoretically and empirically corroborated in the context of choice between durable and nondurable goods. This transmission route is termed the preference channel. If these two channels are operative in the economy, policy makers need to react aggressively to rapid credit growth in order to stabilize the paths of housing prices and output. These findings provide meaningful implications for monetary policy implementation. First of all, central bankers should strive to identify in a timely fashion newly emerging and state-dependent transmission channels of monetary policy, and accurately assess the impact of policy decisions transmitted through these channels. Secondly, the intervention of central banks in the credit or housing market by adjusting policy rates can be optimal, relative to inaction, in circumstances where banks' risk-taking and the preference for housing are overly exuberant.
Author: Andra C. Ghent Publisher: ISBN: Category : Economic forecasting Languages : en Pages : 127
Book Description
In chapter 1, I generate priors for a VAR from a standard RBC model, an RBC model with capital adjustment costs and habit formation, and a sticky price model with an unaccommodating monetary authority. The response of hours worked to a TFP shock differs sharply across these models. I compare the accuracy of the forecasts made with each of the resulting VARs. The economic models generate similar forecast errors to one another. However, the models generally yield forecasts that are quite competitive both with those made using an unrestricted VAR and with those made using a VAR with shrinkage from a Minnesota prior. In chapter 2, I look at the reaction of stock markets to macroeconomic news. It is well known that U.S. monetary policy is well-approximated by a Taylor rule. This suggests a reason why good macroeconomic news sometimes depresses equity returns: good news about the real side of the economy implies tighter future monetary policy. I test this hypothesis by assessing the effect of news on equity returns after controlling for changes in expectations of future monetary policy using Fed Funds Futures data. The results do not support the theory. Furthermore, the negative response of stock markets to unanticipated inflation is unchanged by controlling for changes in monetary policy expectations. In chapter 3, I ask why monetary contractions have strong effects on the housing market. The chapter presents a model with staggered housing adjustment in which monetary policy has real effects in the absence of any rigidity in producer pricing or wages. Limited participation in financial markets leads to a rise in the real mortgage rate following an increase in the nominal short rate. Since households must take on a mortgage to consume housing, the rise in the real interest rate reduces the share of residential investment in output.
Author: Pascal Towbin Publisher: International Monetary Fund ISBN: 1513596233 Category : Business & Economics Languages : en Pages : 35
Book Description
Between 1996 and 2006 the U.S. has experienced an unprecedented boom in house prices. As it has proven to be difficult to explain the large price increase by observable fundamentals, many observers have emphasized the role of speculation, i.e. expectations about future price developments. The argument is, however, often indirect: speculation is treated as a deviation from a benchmark. The present paper aims to identify house price expectation shocks directly. To that purpose, we estimate a VAR model for the U.S. and use sign restrictions to identify house price expectation, housing supply, housing demand, and mortgage rate shocks. House price expectation shocks are the most important driver of the boom and account for about 30 percent of the real house price increase. We also construct a model-based measure of exogenous changes in price expectations and show that this measure leads a survey-based measure of changes in house price expectations. Our main identification scheme leaves open whether expectation shifts are realistic or unrealistic. In extensions, we provide evidence that price expectation shifts during the boom were primarily unrealistic and were only marginally affected by realistic expectations about future fundamentals.
Author: Charles Goodhart Publisher: Oxford University Press ISBN: 0199204594 Category : Business & Economics Languages : en Pages : 247
Book Description
House price bubbles, and their aftermath, have become a focus of macro-economic policy concern in most developed countries. This book elucidates the two-way relationship between house-price fluctuations and economic fundamentals. Housing has many features which make it distinct from other assets, like equity. Real estate is not only an asset but also a durable consumption good for households, providing shelter and other housing services. As a result, a house is often the largest and most important asset of households and therefore accounts for a major share of household wealth. Similarly a large share of bank assets is tied to housing values. House price fluctuations may, therefore, have a major effect on economic activity and the soundness of the financial system. Following an introductory chapter, the book is structured into three parts. The first demonstrates the importance of house prices as determinants or indicators of inflation and economic activity. The second focuses on the inter-relationships between bank credit extension and housing prices, and how bubbles can lead to financial crises. The third discusses resultant public policy issues, such as whether, and how, to include housing prices in a general inflation index, and how to restrain the housing/bank credit cycle.
Author: Sebastian Rast Publisher: ISBN: Category : Inflation (Finance). Languages : en Pages : 173
Book Description
This thesis investigates the dynamics of inflation expectations with a particular focus on survey data. It aims to further the understanding of what drives inflation expectations and what are the implications of changes in inflation expectations for economic choices. The first chapter examines to what extent monetary policy moves household inflation expectations. More specifically, I study the effect of different types of monetary policy announcements on household inflation expectations based on micro data from a survey of German households. As unique feature, interviews of the survey were conducted both shortly before and after monetary policy events. This timing provides a natural experiment to identify the immediate effects of policy announcements on household inflation expectations. In contrast to most existing studies, the availability of the survey over a period of 15 years also allows me to exploit the time-series dimension to estimate how policy announcements affect household inflation expectations over the medium-term. I find that policy rate announcements lead to quick and significant adjustments in household inflation expectations with the effect peaking after half a year. Announcements about forward guidance and quantitative easing, on the other hand, have only small and delayed effects. My results suggest that monetary policy announcements can influence household expectations but further improvements in communication seem to be necessary to reach the general public more effectively. In particular, in an environment where policy rates are constrained by the effective lower bound, it may be very hard for central banks to influence household expectations. In the second chapter, joint with Evi Pappa and Alejandro Vicondoa, we focus on expectations about inflation in the medium to long run and study the implications of changes in these expectations for households' economic choices. We identify in a SVAR shocks that best explain future movements in different measures of underlying inflation at a five-year horizon and label them as news augmented shocks to underlying inflation. Independently of the measure used, such shocks raise the nominal rate and inflation persistently, while they induce mild and short-lived increases in economic activity. The extracted inflation shocks have differential distributional effects. They increase significantly and persistently the consumption of mortgagors and homeowners. Differently from the traditional monetary policy disturbances, news augmented shocks to underlying inflation induce a positive wealth effect for mortgagors and homeowners, driven by a reduction in the real mortgage payments and a persistent increase in real house prices that they induce. The third chapter, joint with Jonas Fisher and Leonardo Melosi, is also about long-run inflation expectations but in this case the focus is on professional forecasters. We use panel data from the U.S. Survey of Professional Forecasters to estimate a model of individual forecaster behavior in an environment where inflation follows a trend-cycle time series process. Our model allows us to estimate the sensitivity of forecasters' long-run expectations to incoming inflation and news about future inflation, and measure the coordination of beliefs about future inflation. We use our model of individual forecasters to study average long-run inflation expectations. Short term changes in inflation have small effects on average expectations; the sensitivity to news is over twice as large, but is still relatively small. These findings provide a partial explanation for why the anchoring and subsequent de-anchoring of average inflation expectations over 1991 to 2020 were such long-lasting episodes. Our model suggests coordination of beliefs also played a role, slowing down but not preventing the pull on average expectations from inflation running persistently below target. We apply our model to the case of a U.S. central banker setting policy in September 2021. Our results suggest the high inflation readings of mid-2021 would have to be followed by overshooting of the Fed's target generally at the high end of the Fed's Summary of Economic Projections to re-anchor long term expectations at their pre-Great Recession level.
Author: Oriol Aspachs-Bracons Publisher: International Monetary Fund ISBN: 1455211842 Category : Business & Economics Languages : en Pages : 54
Book Description
The recent boom-and-bust cycle in housing prices has refreshed the debate on the drivers of housing cycles as well as the appropriate policy response. We analyze the case of Spain, where housing prices have soared since it joined the EMU. We present evidence based on a VAR model, and we calibrate a New Keynesian model of a currency area with durable goods to explain it. We find that labor market rigidities provide stronger amplification effects to all type of shocks than financial frictions do. Finally, we show that when the central bank reacts to house prices, the non-durable sector suffers an important contraction. As a result, the boom-and-bust cycle would not have been avoided if Spain had remained outside the EMU during the 1996-2007 period.
Author: Clara Wolf Publisher: ISBN: Category : Languages : en Pages : 170
Book Description
This thesis investigates heterogeneous topics since it is related to both housing economics and monetary economics, and uses various tools including theoretical modeling, microeconomic policy evaluation and macroeconomic empirical approach. It is constituted of three chapters. The first one, co-authored with Eric Monnet, is interested in the relationship between demographic changes within countries and housing investment. The second one, co-authored with Guillaume Chapelle and Benjamin Vignolles, assesses the impact of a housing tax credit on several dimensions of the housing market. Finally, the third one studies how monetary policy should react to capital inflows when there are frictions on the financial market.
Author: Shihan Xie
Author: Shihan Xie
Author: Min-Ho Nam
Author: Andra C. Ghent
Author: Jane Dokko
Author: Pascal Towbin
Author: Charles Goodhart
Author: Sebastian Rast
Author: Oriol Aspachs-Bracons
Author: Cindy K. Soo
Author: Clara Wolf