Selected Issues Papers

Assessing the Monetary Policy Implications of Changes in Owner-Occupied Housing Cost Measurement: Insights from ICEQMOD

By Amit Kara, Yurii Sholomytskyi

July 18, 2025

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Amit Kara, and Yurii Sholomytskyi. "Assessing the Monetary Policy Implications of Changes in Owner-Occupied Housing Cost Measurement: Insights from ICEQMOD", Selected Issues Papers 2025, 100 (2025), accessed July 19, 2025, https://doi.org/10.5089/9798229019354.018

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Summary

This paper evaluates the policy implications of changing the methodology for calculating the cost of owner-occupied housing in the CPI from a “user cost” approach to “rental equivalence” approach. A synthetic historical CPI series based on the new methodology is created to develop a counterfactual policy scenario in IceQMod, a new Iceland-specific quarterly macroeconomic model based on the IMF’s Quarterly Projection Model (QPM). The new methodology would have resulted in slightly lower but more volatile inflation, potentially allowing for a looser monetary stance. The paper highlights the role that macroprudential tools could play to contain possible financial stability risks resulting from the change and the implications for the equilibrium interest rate and monetary policy.

Subject: Central bank policy rate, Consumer price indexes, Exchange rates, Financial services, Foreign exchange, Housing, Housing prices, Inflation, Inflation targeting, Monetary policy, National accounts, Output gap, Prices, Production, Real exchange rates, Real interest rates

Keywords: Asset prices, Central bank policy rate, Consumer price indexes, CPI Inflation, Exchange rate devaluation, Exchange rates, Financial Stability, Housing, Housing prices, Iceland, Inflation, Inflation targeting, Monetary Policy, Output gap, Owner-occupied Housing, Real exchange rates, Real interest rates

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