Owner Occupied Housing in the CPI and its Impact on Monetary Policy during Housing Booms and Busts

Robert J. Hill, Miriam Steurer, Sofie R. Waltl

Publication: Working/Discussion PaperWU Working Paper

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Abstract

The treatment of owner-occupied housing (OOH) is probably the most important unresolved issue in inflation measurement. How -- and whether -- it is included in the Consumer Price Index (CPI) affects inflation expectations, the measured level of real interest rates, and the behavior of governments, central banks and market participants. We show that none of the existing treatments of OOH are fit for purpose. Hence we propose a new simplified user cost
method with better properties. Using a micro-level dataset, we then compare the empirical behavior of eight different treatments of OOH. Our preferred user cost approach pushes up the CPI during housing booms (by 2 percentage points or more). Our findings relate to the following important debates in macroeconomics: the behavior of the Phillips curve in the US during the global financial crisis, and the response of monetary policy to housing booms, secular
stagnation, and globalization.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 1 Jul 2019

Publication series

NameDepartment of Economics Working Paper Series
No.285

WU Working Paper Series

  • Department of Economics Working Paper Series

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