Understanding Economic Dynamics: Inflation, Loans, and Housing Supply
Paper Session
Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)
- Chair: Kwang Soo Cheong, Johns Hopkins University
Heterogeneity in Household Inflation Expectations: Policy Implications
Abstract
We empirically characterize the heterogeneity in the conditional distribution of household inflation expectations across demographic groups using the Survey of Consumer Expectations and also investigate how monetary policy shocks affect the conditional distribution. We find that, across all the groups, the peak of the group-specific distribution of household inflation expectations aligns closely with the 2% target set by the Federal Reserve, but there is substantial heterogeneity both within and across groups, primarily on the right. However, in response to a contractionary monetary policy shock identified by high-frequency financial market response (Bauer and Swanson 2023), households overall adjust their inflation expectations significantly downward. In addition, the magnitude of the reaction is more pronounced in the upper quantile of low income/low education groups whose unconditional inflation expectations are less well anchored. Our findings suggest that forward guidance on the future path of monetary policy can be effective in stabilizing inflation expectations even in the presence of substantial heterogeneities in the level of inflation expectations among households.Inflation Indexation and Zero Lower Bound
Abstract
This study quantitatively examines the impact of nominal loans on business cycle fluctuations using a Heterogeneous-Agent New Keynesian (HANK) model that incorporates an occasionally binding zero lower bound (ZLB). The findings suggest that substituting nominal government bonds with real government bonds significantly reduces the volatility of output and inflation while also decreasing the frequency of ZLB events. Real loans effectively decouple real interest rates from inflation, thereby preventing an increase in real interest rates at the ZLB. As a result, ZLB events become less costly, diminishing the need for precautionary savings against aggregate risk. This mechanism contributes to higher average nominal interest rates and further reduces the frequency of ZLB episodes, ultimately lowering aggregate volatility. The stabilizing effect of this substitution becomes more pronounced with greater income inequality.Land Development and Frictions to Housing Supply Over the Business Cycle
Abstract
Using a novel data set of U.S. residential land developments, we document that the average time to develop residential properties—which includes both the time spent preparing land infrastructures and construction—is about three years, consistent with sizable lags in housing investment projects. We show that the time to develop is highly dispersed across locations, a finding that helps quantify the housing supply elasticity that is relevant for assessing local housing variations over the business cycle. We also show that incorporating long and dispersed time to develop into an otherwise standard housing investment model helps rationalize some empirical facts on the housing market. Our model implies that policies to boost housing supply are less effective in immediately stabilizing house prices for regions where land development takes a long time.JEL Classifications
- E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
- E3 - Prices, Business Fluctuations, and Cycles