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Monetary Policy, Heterogeneity and the Housing Channel

Serdar Ozkan (), Kurt Mitman, Fatih Karahan () and Aaron Hedlund
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Aaron Hedlund: University of Missouri

No 663, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We investigate the role of housing and mortgage debt in the transmission of monetary policy to household consumption and the aggregate economy. In order to do so, we develop a heterogenous agents model with a frictional housing market, nominal long-term borrowing, default, and price rigidities. The model is able to capture rich heterogeneity in home ownership and leverage. Endogenous cyclical movements in house prices as well as counter-cyclical dynamics in the liquidity of housing allows us to explore the various indirect mechanisms through which monetary policy affects consumption. Nominal long-term mortgage debt implies that changes in monetary policy will result in redistribution between lenders and borrowers. Further, a contractionary monetary policy shock raises the cost of borrowing which reduces liquidity in the housing market, depresses house prices and feeds back into increasing the cost of borrowing. We find that this amplification channel disproportionally affects households with high leverage and high marginal propensities to consume. Finally, we investigate how booms and busts in the housing market asymmetrically affect the efficacy of monetary policy.

Date: 2016
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-ure
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