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

Selected Issues Papers, July 18, 2025

Source details

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

Evaluates policy implications of changing the CPI measurement for owner-occupied housing from a “user cost” approach to a “rental equivalence” approach.
Constructs a synthetic historical CPI series using the new methodology.
Develops a counterfactual policy scenario in IceQMod, an Iceland-specific quarterly macroeconomic model based on the IMF’s Quarterly Projection Model (QPM).

The new rental equivalence methodology would have resulted in slightly lower but more volatile inflation.
The change in measured inflation could have allowed for a looser monetary stance under the counterfactual scenario.
The paper highlights implications for the equilibrium interest rate and for monetary policy more broadly.
Macroprudential risks: potential financial stability risks could arise from the measurement change and warrant attention.

Monetary policy: A change to rental equivalence measurement can affect inflation paths and thus the appropriate monetary stance; policymakers should account for increased volatility in inflation when setting policy.
Macroprudential policy: Use of macroprudential tools is emphasized to contain possible financial stability risks associated with the measurement change and its effects on housing and credit dynamics.
Equilibrium interest rate: The measurement change has implications for assessments of the equilibrium interest rate, which should be incorporated into policy analysis.

Subjects: Central bank policy rate, Consumer price indexes, Financial services, Housing, Housing prices, Inflation, National accounts, Prices
Keywords: Central bank policy rate, Consumer price indexes, CPI from a user cost, CPI Inflation, CPI series, Financial Stability, house price inflation, Housing, Housing prices, Iceland, Inflation, Monetary Policy, monetary policy implication, Owner-occupied Housing, reaction function

Source: IMF Selected Issues Paper No. 2025/100 (Amit Kara and Yurii Sholomytskyi, July 18, 2025).