Do Central Banks React to House Prices?

We estimate the Federal Reserve's, the Bank of England's, and the Bank of Japan's responses to house prices. We show that generalized method of moments estimates of a Taylor rule augmented with house prices are biased and dispersed. We then use full‐information methods and estimate the policy rule together with a VAR for the nonpolicy variables. These estimates are also biased. We propose an alternative approach and estimate a dynamic stochastic general equilibrium model embedded with a monetary rule with a direct response to house prices. We find that house prices played a separate role in the reaction functions of these central banks.     

What Asset Prices Should Be Targeted by a Central Bank?

This paper investigates the monetary policy design for restoring equilibrium determinacy. Our interests are whether a central bank should respond to asset price fluctuations, and if so, what asset prices should be targeted. We show that a monetary policy response to the price of a productive tangible asset (capital price) is helpful for equilibrium determinacy, while that to the price of an intangible asset that reflects a firm's profit (share prices) is a source of equilibrium indeterminacy. This result comes from the two assets' prices moving in opposite directions in response to a permanent increase in inflation.     

The Interaction of Monetary and Macroprudential Policies

I analyze a New Keynesian dynamic stochastic general equilibrium (DSGE) model where the financing of productive investment is affected by a moral hazard problem. I solve for jointly Ramsey‐optimal monetary and macroprudential policies. I find that when a financial friction is present in addition to the standard nominal friction, the optimal policy can replicate the first‐best allocation if the social planner can conduct both monetary and macroprudential policy. Using monetary policy alone is not enough: a policy trade‐off between stabilizing inflation and output gap emerges. When policy follows simple rules, the source of fluctuations is relevant for the choice of the appropriate policy mix.     

Monetary Regime Switches and Central Bank Preferences

Monetary policy objectives and targets are not necessarily constant over time. The regime‐switching literature has typically analyzed and interpreted changes in policymakers' behavior through simple interest rate rules. This paper analyzes policy regime switches by explicitly modeling policymakers' behavior and objectives. We show that changes in the parameters of simple rules do not necessarily correspond to changes in policymakers' preferences. In fact, capturing and interpreting regime changes in preferences through interest rate rules can lead to misleading results.     

Monetary Policy and the Natural Rate of Interest

It is most important for monetary policy to track the natural rate of interest when interest rates take large and sustained swings away from their long‐run equilibrium values. Here, we study two models: a standard New Keynesian model and one in which government bonds provide liquidity. Policy rules that cannot track the natural rate perform poorly in both models, but are especially bad in the second because of sustained movements in the natural rate induced by fiscal shocks. First difference rules, on the other hand, do surprisingly well. When model uncertainty is taken into account, the dominance of the first difference rule is even more pronounced.     

Household Debt Overhang and Transmission of Monetary Policy

We investigate how the level of household indebtedness affects the monetary transmission mechanism in the U.S. economy. Using state‐dependent local projection methods, we find that the effects of monetary policy are less powerful during periods of high household debt. In particular, the impact of monetary policy shocks is smaller on GDP, consumption, residential investment, house prices, and household debt during a high‐debt state. We then build a partial equilibrium model of borrower households with financial constraints to rationalize these facts. The model points to the weakening of the home equity loan channel as a possible reason for the decline in monetary policy effectiveness when initial debt levels are high.     

The Bank Lending Channel: A FAVAR Analysis

We examine the bank lending channel (BLC) of monetary transmission in a factor‐augmented vector autoregression (FAVAR). A FAVAR exploits large numbers of macro‐economic indicators and allows us to consider an alternative identification of monetary shocks and analyze the lending response of banks at the aggregate and individual levels. We find that the existence of the BLC is more prevalent than previously thought using aggregated lending data, while the lending response of individual banks are driven more by specific innovations than monetary shocks. Nonetheless, the average individual bank response to a monetary shock is consistent with the existence of a BLC.     

Working Less and Bargain Hunting More: Macroimplications of Sales during Japan's Lost Decades

Standard New Keynesian models have often neglected temporary sales. In this study, we ask whether this treatment is appropriate. We use Japanese scanner data covering the last two decades and find a negative correlation between the frequency of sales and hours worked. We then construct a model that takes households' decisions regarding their allocation of time for work, leisure, and bargain hunting into account. We show that the decline in hours worked explains the rise in the frequency of sales. The real effect of monetary policy shocks weakens by around 40% due to temporary sales, but monetary policy still matters.     

One Size Fits All? Monetary Policy and Asymmetric Household Debt Cycles in U.S. States

I investigate the nonlinear effects of monetary policy through differences in household debt across U.S. states. After constructing a novel indicator of inflation for the states, I compute state‐specific monetary policy stances as deviations from an aggregate Taylor rule. I find that the effectiveness of monetary policy is curtailed during periods of large household debt imbalances. Moreover, a common U.S. monetary policy does not fit all; it may have asymmetric effects on the economic performance across states, particularly at times of high dispersion in the household debt imbalances, as it may have been the case around the Great Recession.