House Prices, Inflation, and Unconventional Monetary Policy

Abstract

The role of house prices in the mechanism of monetary policy transmission has been a live topic that attracts considerable attention among policy makers and academic researchers in recent years. In this paper, we examine the role of house prices in the unconventional monetary policy transmission mechanism of Japan both theoretically and empirically. We first build a basic New Keynesian model with collateral constraints while using monetary transfers as the unconventional monetary policy instrument under an assumption of the short-term interest rate reaching zero lower bound (ZLB). We find that when given a rise in loan-to-value ratio or house prices, output, and inflation increases, and the effect of an expansionary monetary transfer shock to the economy is amplified by causing a rise in house prices. To examine the theoretical findings empirically, we propose a structural vector autoregression (VAR) model using monthly aggregate data series of Japanese macroeconomy from 2001 to 2015. And we observe that expansionary monetary base shocks generate a persistent rise in real output, inflation, and real house prices while a positive housing price shock also leads to a short-term rise in real output and inflation, which match the simulation results in our theoretical model. Hence, we have examined the important role of housing prices in the unconventional monetary policy transmission, which may have meaningful implications for monetary policy decision making.