Forward Guidance Effectiveness in a New Keynesian Model with Housing Frictions

Document Type

Article

Publication Date

2023

Publisher

Walter de Gruyter

Source Publication

The B. E. Journal of Macroeconomics (BEJM)

Source ISSN

1935-1690

Original Item ID

DOI: 10.1515/bejm-2021-0197

Abstract

Housing markets are closely related to monetary policy. This paper studies the link between housing frictions and the effectiveness of forward guidance. A housing collateral constraint and forward guidance shocks are incorporated into a standard medium-scale New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. Our main results produce a number of important implications. First, financial frictions emanating from the housing market dampen the effectiveness of forward guidance on the economy. Second, forward guidance shocks generate welfare gains, though the magnitude of these gains declines when housing frictions increase. Housing frictions also attenuate the effect of forward guidance at the zero lower bound. Finally, this article provides a solution to “forward guidance puzzle” of Del Negro, M., M. P. Giannoni, and C. Patterson (2012. “The Forward Guidance Puzzle.” In FRB of New York Staff Report, 574). Thus, policymakers should consider housing frictions when examining the effects of forward guidance on the economy.

Comments

The B. E. Journal of Economics, Vol. 23, No. 1 (2023): 551-590. DOI.

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