Sunday, September 02, 2007

House Prices in the Taylor Rule?

Rick Mishkin seems to think that house prices should be added to the Taylor rule:

Central bankers should ease monetary policy quickly and aggressively in response to a big fall in house prices, Federal Reserve governor Frederic Mishkin said on Saturday.

Presenting a paper on the final day of the Fed’s Jackson Hole symposium, Mr Mishkin said policymakers should not wait until output falls, but should “react immediately to the house price decline when they see it.”

He said the optimal policy response was both quicker and more aggressive than that suggested by a standard policy rule, in which policymakers respond only to deviations in output and inflation.

He said simulations show that this approach “can be very successful at counteracting the real effects” of even a large house price slump, because of the long lags from changes in housing wealth to changes in consumer spending.

From the FT.

Update: Here is the Mishkin paper.