Kocherlakota , Narayana

But suppose for a moment that we do accept the claim that housing is somehow critical for an economic turnaround. I’m not sure how, if at all, it would affect my thinking as a monetary policymaker. The Federal Reserve can only influence the housing market by manipulating interest rates. But there is little evidence that interest rates have a big influence on housing starts. For example, in a 2007 National Bureau of Economic Research paper on housing and the business cycle, UCLA professor Edward Leamer estimated a relationship between current housing starts, past housing starts, and interest rates. The Minneapolis Fed banking studies group has used Leamer’s estimates to calculate the impact of a 100-basis-point permanent decrease in 10-year Treasury yields on housing starts one year from now. The group has found that housing starts would be 11 percent higher with the rate cut than without it. This effect would be barely noticeable, given that housing starts need to nearly triple to get back to their normal level.