Housing and Monetary Policy: Evidence of the Stabilization Effect in Korea derived from a DSGE Model
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Research interest concerning macroeconomic linkages in housing has piqued since the Global Financial Crisis (GFC) of 2007-09. This paper documents evidence of such linkage in the Korean context derived from a DSGE(Dynamic Stochastic General Equilibrium) model that controls endogenous relationships between housing price and key macroeconomic variables. In particular, there are two analytical issues in our theoretical and empirical investigation: (1) the intra-temporal (or single-period) substitution between housing and non-housing consumption and (2) the stabilization effect of monetary policy from two alternative policy rules – a conventional Taylor rule that does not consider housing price vs. a modified Taylor rule that does. The results show that: (1) housing and non-housing consumption in Korea are complements, rather than substitutes, implying a positive wealth effect in that a rise in one variable causes the same direction in the other and (2) the modified Taylor rule with explicit control of housing prices is shown to be superior over the conventional rule in that both output volatility and inflation volatility are shown to be reduced under the former. These results support the Bank of Korea which considers the housing market in monetary policy.
Abstract
Research interest concerning macroeconomic linkages in housing has piqued since the Global Financial Crisis (GFC) of 2007-09. This paper documents evidence of such linkage in the Korean context derived from a DSGE(Dynamic Stochastic General Equilibrium) model that controls endogenous relationships between housing price and key macroeconomic variables. In particular, there are two analytical issues in our theoretical and empirical investigation: (1) the intra-temporal (or single-period) substitution between housing and non-housing consumption and (2) the stabilization effect of monetary policy from two alternative policy rules – a conventional Taylor rule that does not consider housing price vs. a modified Taylor rule that does. The results show that: (1) housing and non-housing consumption in Korea are complements, rather than substitutes, implying a positive wealth effect in that a rise in one variable causes the same direction in the other and (2) the modified Taylor rule with explicit control of housing prices is shown to be superior over the conventional rule in that both output volatility and inflation volatility are shown to be reduced under the former. These results support the Bank of Korea which considers the housing market in monetary policy.
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