The housing supply channel of monetary policy

Martin Iseringhausen
Authors registered in the RePEc Author Service: Frederic Opitz

Working Papers from European Stability Mechanism

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.

Keywords: Credit conditions; FAVAR; house prices; monetary policy; regional data; supply elasticities (search for similar items in EconPapers)
JEL-codes: C23 E32 E52 R31 (search for similar items in EconPapers)
Pages: 57
Date: 2024-02-05, Revised 2024-02-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: The Housing Supply Channel of Monetary Policy (2024)
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