Staff Working Paper No. 1,169
By Vedanta Dhamija, Ricardo Nunes and Roshni Tara
Housing is a closely monitored and prominent sector for households. We find that households in the United States tend to overweight house price expectations when forming inflation expectations with a coefficient of 25%–45%, significantly above the weight of house prices in the inflation index. We first use two data sets, a multitude of controls, and an instrumental variable approach to address endogeneity. We then use a second strategy based on household heterogeneity. As expected, we find a significant effect of numeracy skills and whether households moved house recently. We model this household behaviour in a two-sector New Keynesian model with an overweighted and a non-overweighted sector and show that overweighted sectors are disproportionately more important for monetary policy.
House price expectations and inflation expectations: evidence from survey data
