Research

Gauging the Influence of House-Price Expectations on MPC Heterogeneity


This paper identifies a new determinant of household marginal propensities to consume (MPC): house-price growth expectations. We exploit a detailed and representative data set of Dutch households that allows us to link housing and savings decisions with house-price growth expectations and monetary policy shocks. We document a positive empirical relationship between expected house-price growth and the propensity of households to move—both unconditionally and in response to monetary policy shocks. We explain this pattern using a structural life-cycle model of consumption and savings that features mortgage-financed owned- and rental-housing, and where households have subjective beliefs about future house prices. Due to the housing capital gains channel, households with higher expectations have a higher likelihood of moving. This in turn, leads to higher average and more heterogeneous MPCs, as housing is complementary to non-durable consumption. These results carry over to the rebate coefficients (RC) from government stimulus transfers. Low-expectation households tend to have low and insensitive RCs, while high-expectation households exhibit higher and more dispersed RCs, both per stimulus package and across stimulus sizes.


House Price Expectations and Choices in the Netherlands

(with Alexander Ludwig, Jochen Mankart, and Mirko Wiederholt)

Expectations are central for housing decisions and heterogeneity in expectations is a robust feature of survey data. We study the implications of heterogeneity in house price growth expectations for the level of house prices. We feed the joint empirical distributions of income, wealth, and expectations into a calibrated heterogeneous agents housing model. We find that eliminating heterogeneity in house price growth expectations would raise average house prices and amplify house price fluctuations thereby reducing the fit of the model. Without heterogeneity, average house prices would be about 7 percent and the boom-bust cycle would be about 25 percent larger.


Coordinating Monetary and Macroprudential Policy under Model Uncertainty

(with Michael Binder, Philipp Lieberknecht and Volker Wieland)

We investigate the performance of optimized macroprudential policy rules within and across three canonical New Keynesian DSGE models with banking frictions. Under perfect coordination between macroprudential and monetary policy, model-specific optimized policy rules are highly heterogeneous across models and imply large losses when evaluated in other models. This lack of robustness to model uncertainty occurs because monetary policy leans towards financial stability and neglects inflation targeting. A Stackelberg regime with the central bank acting as first mover restricts monetary policy to pursue inflation targeting and hence yields smaller potential costs due to model uncertainty. An even more effective approach for policymakers to insure against model uncertainty across banking friction models is to design Bayesian model-averaged optimized macroprudential rules, regardless of the regime of interaction.


Model Uncertainty in Macroeconomics: On the Implications of Financial Frictions

(with Michael Binder, Philipp Lieberknecht and Volker Wieland)

For some time now, structural macroeconomic models used at central banks have been predominantly New Keynesian DSGE models featuring nominal rigidities and forward-looking decision-making. While these features are widely deemed crucial for policy evaluation exercises, most central banks have added more detailed characterizations of the financial sector to these models following the Great Recession in order to improve their fit to the data and their forecasting performance. We employ a comparative approach to investigate the characteristics of this new generation of New Keynesian DSGE models and document an elevated degree of model uncertainty relative to earlier model generations. Policy transmission is highly heterogeneous across types of financial frictions and monetary policy causes larger effects, on average. The New Keynesian DSGE models we analyze suggest that a simple policy rule robust to model uncertainty involves a weaker response to inflation and the output gap in the presence of financial frictions as compared to earlier generations of such models. Leaning-against-the-wind policies in models of this class estimated for the Euro Area do not lead to substantial gains. With regard to forecasting performance, the inclusion of financial frictions can generate improvements, if conditioned on appropriate data. Looking forward, we argue that model-averaging and embracing alternative modelling paradigms is likely to yield a more robust framework for the conduct of monetary policy.


Robust Macro-Prudential and Regulatory Policies under Model Uncertainty

(with Michael Binder, Philipp Lieberknecht and Volker Wieland)

Macroprudential policy robustness is defined as a search for parameters governing macroprudential policy rules that perform well across a range of policy-focused structural macroeconomic models. This study focuses on models with a banking sector that are drawn from the Macroeconomic Model Database to analyze the implications of model uncertainty for robust macroprudential rules under three instruments: the capital-to-assets, loan-to-value and loan-to-deposits ratios. We consider two regimes for the interaction between monetary and macroprudential policy and find that between a regime in which the monetary authority plays the role of the Stackelberg leader vs. one of perfect coordination between the central bank and the macroprudential authority, there are strong reasons to favor the former. Employing the monetary policy rule of Orphanides and Wieland (2013) as a benchmark, the leader-follower regime is able to yield less volatile inflation dynamics without necessarily increasing the standard deviation of the credit gap by sizeable amounts. Further, because the rule of Orphanides and Wieland (2013) is able to induce determinacy and stability in the set of financial frictions models considered, model-specific optimal policies under the leader-follower regime imply smaller potential costs due to model uncertainty than those under the perfect-coordination regime. In this context, robust policies can further insure against model uncertainty and effectively stabilize the credit gap. The best-performing robust macroprudential policies are modestly countercyclical and persistent CTA and LTV ratio rules as these yield the lowest credit-gap-based loss while achieving stable dynamics in inflation and the output gap. Robust policies under the perfect-coordination regime, in contrast, lead to passive monetary policy rules that increase the standard deviation of inflation and the output gap, while generating only marginal gains in credit gap stabilization.


Robust Monetary and Fiscal Policies under Model Uncertainty

(with Elena Afanasyeva, Michael Binder and Volker Wieland)

Policy robustness is defined as a search for monetary and fiscal rules that perform well across a wide range of policy-focused macro models. This paper draws on multiple models from the Macroeconomic Model Database to study the impact of new models with rich financial sector frictions on the form of robust monetary and fiscal rules for the Euro Area -- in particular, relative to earlier generation macroeconomic models. We document that for the models with financial frictions studied in this paper, robust monetary policies feature a weaker response to inflation and the output gap than for their standard New Keynesian counterparts. We also document that for this class of models a systematic and direct response of the monetary policy rate to financial sector variables, i.e., a leaning-against-the-wind-type monetary policy, does not appear advisable. Lastly, we consider an active rules-based role for fiscal policy in macroeconomic and debt stabilization.


Computation of Temporary Equilibria in the Presence of Heterogeneous Expectations