Monetary policy, housing investment, and heterogeneous regional markets

Michael Fratantoni and Scott Schuh

No 00-1, Working Papers from Federal Reserve Bank of Boston

Abstract: This paper quantifies the importance of heterogeneity in regional housing markets for the conduct of monetary policy using a new model called an aggregation VAR (AVAR). The model integrates a national financial market with regional housing markets, imposing all exact aggregation conditions. Monetary policy is transmitted to the real economy through the mortgage rate. The AVAR model is based on linear VARs, but its aggregate impulse responses exhibit two nonlinearities: (1) time variation stemming from aggregation over heterogeneous regions, and (2) state dependence on initial economic conditions in regions. Thus, the effect of monetary policy on the real economy depends on the extent and nature of regional heterogeneity, which vary over time. Using longitudinal data for detailed U.S. regions, we estimate the effects of time variation and state dependence on the dynamic responses of the AVAR model. These estimates, and aggregation bias, provide plausible and tangible explanations for \"long and variable\" lags in monetary policy. As an example, we show how the AVAR model can simulate the effects of coastal housing booms on the efficacy of monetary policy.

Keywords: Monetary policy; Housing (search for similar items in EconPapers)
Date: 2000
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.bostonfed.org/economic/wp/wp2000/wp00_1.htm (text/html)
http://www.bostonfed.org/economic/wp/wp2000/wp00_1.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbwp:00-1

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Boston Contact information at EDIRC.
Bibliographic data for series maintained by Catherine Spozio ().