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.
Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.
Recommended Citation
Cole, Stephen J. and Huh, Sungjun, "Forward Guidance Effectiveness in a New Keynesian Model with Housing Frictions" (2023). Economics Faculty Research and Publications. 640.
https://epublications.marquette.edu/econ_fac/640
Comments
Published version. The B. E. Journal of Economics, Vol. 23, No. 1 (2023): 551-590. DOI. © 2023 Walter de Gruyter. Used with permission. This work is licensed under the Creative Commons Attribution 4.0 International License.