Title: The housing supply channel of monetary policy
Download PDF: Working Paper 59
This paper studies the role of housing supply constraints in explaining regional differences in the transmission of monetary policy to housing markets, economic activity, and the financial sector.
Authors: Bruno Albuquerque (IMF, Univ. of Coimbra, CeBER), Martin Iseringhausen (ESM), Frederic Opitz (EC, Ghent University).
Abstract:
We study the role of regional housing markets in the transmission of US monetary policy. Using a FAVAR model over 1999q1–2019q4, we find sizeable heterogeneity in the responses of US states to a contractionary monetary policy shock. Part of this regional variation is due to differences in housing supply elasticities, household debt overhang, and housing wealth (volatility). Our analysis indicates that house prices and consumption respond more in supply-inelastic states and in states with large household debt imbalances, where negative housing wealth effects bite more strongly and borrowing constraints become more binding. Moreover, financial stability risks increase sharply in these areas as mortgage delinquencies and foreclosures surge, worsening banks’ balance sheets. Finally, monetary policy may have a stronger effect on housing tenure decisions in supply-inelastic states, where the homeownership rate and price-to-rent ratios decline by more. Our findings stress the importance of regional housing supply conditions in assessing the macrofinancial effects of rising interest rates.
Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.
Keywords: Credit conditions, FAVAR, house prices, monetary policy, regional data, supply elasticities
JEL codes: C23, E32, E52, R31