Event start date: 30.04.2021 16:00

On 30 April 2021, the National Bank of Ukraine hosted an open research seminar, during which Prof. Klaus Adam (Deutsche Bundesbank) presented the research paper "Falling Natural Rates, Rising Housing Volatility and the Optimal Inflation Target". The decline in natural interest rates in advanced economies over the past decades has been accompanied by a significant increase in the volatility of housing prices. In this work the author shows, that the monetary policy implications of these macroeconomic trends depend--in the presence of a lower-bound constraint on nominal rates--on the source of increased housing price volatility. If housing price expectations are rational, increased housing price volatility reflects more volatile housing demand shocks. Under optimal monetary policy, average inflation then increases only minimally, as average natural rates fall and housing shocks become more volatile. Instead, if housing price volatility is partly due to speculative housing price beliefs, as suggested by survey data, then lower natural rates endogenously trigger larger fluctuations in subjective housing price beliefs and housing prices. A belief-driven increase in housing price volatility causes also the natural rate of interest to become more volatile. Under optimal monetary policy, average inflation then rises much more strongly following a fall in natural rates, rationalizing larger increases in the inflation target.

Materials from the seminar are available via links below.