Working Paper: NBER ID: w14223
Authors: James D. Hamilton
Abstract: This paper offers an explication of the hump-shaped response of real economic activity to changes in monetary policy, focusing on the particular channel operating through new home sales. I suggest that the conventional notion of a monetary policy shock as a surprise change in the fed funds rate is misspecified. The primary news for market participants is not what the Fed just did, but is instead new information about what the Fed is going to do in the near future. Revisions in these anticipations show up instantaneously in long-term mortgage rates. Although mortgage rates respond well before the Fed actually changes its target rate, home sales do not respond until much later. The paper attributes this delay to cross-sectional heterogeneity in search times. This framework offers a description of the lags in the effects of monetary policy that is both more detailed, allowing us in principle to measure the consequences at the daily frequency, and more believable than traditional measures.
Keywords: Monetary Policy; Home Sales; Mortgage Rates; Economic Activity
JEL Codes: E44; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary Policy Shock (new information about Fed's future actions) (E52) | Long-term Mortgage Rates (E43) |
| Long-term Mortgage Rates (E43) | New Home Sales (R31) |
| Fed funds rate increase (E52) | Long-term Mortgage Rates increase (E43) |