Abstract

This paper builds up a model for a rental housing market. With a search and matching friction in a rental housing market, a new house entry is endogenized according to a business cycle. A price negotiation happens only when owner and tenant newly match and make a contract for a rental price. After making a contract, a rental price is fixed until the contract ends. Simulations show that variations of a price and a market tightness change according to a search friction in a housing market, a speed of a housing cycle, a bargaining power between owner and tenant for a price setting. An extensive margin effect brought by a housing entry well contributes to a price variation and this effect significantly changes by parameters.  

Introduction

Former studies, such as Wheaton (1990), focus on a search behavior in a housing market and show advantage of a search model to explain a housing market.
Non-homeownership rates are at nontrivial level for a business cycle analysis across countries. In Japan, Statistics Bureau of Japan (2018) shows that a non-homeownership rate keep about 40 percent for many years. Australian Bureau of Statistics reports that the proportion of Australian households renting their home is 32 percent in 2017–18. In the U.S., the Census Bureau releases national non-homeownership rates and it is about 35 percent in the last few years. As well as buying and selling houses, a leasing house behavior can contribute to a business cycle.  

WP015

2020.02

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Abstract

This paper develops a price model with a product cycle. Through a frictional product market with search and matching frictions, an endogenous product cycle is accompanied with a price cycle where a price for a new good and a price for an existing good are set in a different manner. This model nests a New Keynesian Phillips curve with the Calvo's price adjustment as a special case and generates several new phenomena. Our simple model captures observed facts in Japanese product level data such as the pro-cyclicality among product entry, demand, and price. In a general equilibrium model, an endogenous product entry increases variation of the inflation rate by 20 percent in Japan. This number increases to 72 percent with a price discounting after a first price.

Introduction

"We have all visited several stores to check prices and/or to find the right item or the right size. Similarly, it can take time and effort for a worker to find a suitable job with suitable pay and for employers to receive and evaluate applications for job openings. Search theory explores the workings of markets once facts such as these are incorporated into the analysis. Adequate analysis of market frictions needs to consider how reactions to frictions change the overall economic environment: not only do frictions change incentives for buyers and sellers, but the responses to the changed incentives also alter the economic environment for all the participants in the market. Because of these feedback effects, seemingly small frictions can have large effects on outcomes."

Peter Diamond

WP009

2019.09

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Abstract

This paper investigates how expectation formation affects monetary policy effectiveness in a liquidity trap. We examine two expectation formations: (i) different degrees in anchoring expectation and (ii) different degrees in forward-lookingness to form expectation. We reveal several points as follows. First, under optimal commitment policy, expectation formation for an inflation rate does not markedly change the effects of monetary policy. Second, contrary to optimal commitment policy, the effects of monetary policy significantly change according to different inflation expectation formations under the Taylor rule. The reductions to an inflation rate and the output gap are mitigated if the expectation is well anchored. This rule, however, can not avoid large drops when the degree of forward-lookingness to form expectation decreases. Third, a simple rule with price-level targeting shows some similar outcomes according to different expectation formations as the Taylor rule does. However, in a simple rule with price-level targeting, an inflation rate and the output gap drop less severe due to a history dependent easing and are less sensitive to expectation formations than in the Taylor rule. Even for the Japanese economy, the effects of monetary policy on economic dynamics significantly change according to expectation formations for rules except optimal commitment policy. Furthermore, when the same expectation formations for the output gap are assumed, we observe similar outcomes.

Introduction

Expectation is one of the most important factors in the conduct of monetary policy. In particular, managing expectation of an agent is a nontrivial tool in a liquidity trap since the central bank faces limitation in reducing the policy interest rate. A lot of papers, such as Eggertsson and Woodford (2003b), Jung, Teranishi, and Watanabe (2005), Adam and Billi (2006, 2007), and Nakov (2008), analyze optimal monetary policy in a liquidity trap and conclude that optimal commitment policy is very effective. The commitment policy can reduce the real interest rate and stimulate the economy by controlling the inflation expectation. Their conclusions, however, are solely dependent on two important assumptions, i.e., rational expectation and optimal commitment monetary policy.

2018.02

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Abstract

This paper develops a price model with a search foundation based on product cycles and prices. Observations conclude that firms match with a new product, then set a new price through negotiation and fix the price until the product exits from a market. This evident behavior results in a new model of price stickiness as a Search-based Phillips curve. The model includes a New Keynesian Phillips curve with Calvo’s price adjustment as a special case and describes new phenomena. First, new parameters and variables of a frictional goods market determine price dynamics. As separation rate in a goods market decreases, price becomes more sticky, i.e., a flatter slope in a Search-based Phillips curve, since the product turnover cycle is sluggish. Moreover, other goods market features, such as probability of match, elasticity of match, and bargaining power for a price setting decide price dynamics. Second, goods market friction can make endogenously persistent inflation dynamics without an assumption of indexation to a lagged inflation rate. Third, when the number of a product persistently increases, deflation continues for a long period. It can explain a secular deflation.

Introduction

“We have all visited several stores to check prices and/or to find the right item or the right size. Similarly, it can take time and effort for a worker to find a suitable job with suitable pay and for employers to receive and evaluate applications for job openings. Search theory explores the workings of markets once facts such as these are incorporated into the analysis. Adequate analysis of market frictions needs to consider how reactions to frictions change the overall economic environment: not only do frictions change incentives for buyers and sellers, but the responses to the changed incentives also alter the economic environment for all the participants in the market. Because of these feedback effects, seemingly small frictions can have large effects on outcomes.”

2018.02

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Abstract

This paper investigates history dependent easing known as a conventional wisdom of optimal monetary policy in a liquidity trap. We show that, in an economy where the rate of inflation exhibits intrinsic persistence, monetary tightening is earlier as inflation becomes more persistent. This property is referred as early tightening and in the case of a higher degree of inflation persistence, a central bank implements front-loaded tightening so that it terminates the zero interest rate policy even before the natural rate of interest turns positive. As a prominent feature in a liquidity trap, a forward guidance of smoothing the change in inflation rates contributes to an early termination of the zero interest rate policy.

Introduction

The theory of monetary policy has been developed since 1990s based on a new Keynesian model as represented by Clarida et al. (1999) and Woodford (2003). In particular, Woodford (2003) finds history dependence as a general property of optimal monetary policy. The optimal monetary policy rule explicitly includes lagged endogenous variables and the current monetary policy reflects the past economic environment.

2016.02

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Abstract

This paper introduces financial market frictions into a standard New Keynesian model through search and matching in the credit market. Under such financial market frictions, a second-order approximation of social welfare includes a term involving credit, in addition to terms for inflation and consumption. As a consequence, the optimal monetary and macroprudential policies must contribute to both financial and price stability. This result holds for various approximated welfares that can change corresponding to macroprudential policy variables. The key features of optimal policies are as follows. The optimal monetary policy requires keeping the credit market countercyclical against the real economy. Commitment in monetary and macroprudential policy, rather than approximated welfare, justifies history dependence and pre-emptiveness. Appropriate combinations of macroprudential and monetary policy achieve perfect financial and price stability.

Introduction

The serious economic disruptions caused by financial crises reveal the critical roles played by financial markets in the U.S. and the Euro area. Acknowledging that the current policy framework cannot fully mitigate nor avoid financial crises, policymakers have begun to shed light on two policy measures. The first is monetary policy, which aims to achieve, in addition to traditional policy goals, stability of the financial system. The second is a new policy tool, macroprudential policy geared toward financial stability.

2014.09

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