Essays on monetary policy and the housing markets
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Citation
Abstract
In this dissertation, I study how monetary policy affects the euro area and the United States through the housing and mortgage markets. I do so by providing empirical evidence and by employing structural models calibrated to household balance sheets data.
In the first chapter, I build a quantitative currency-union New Keynesian model in which I incorporate key euro area housing and mortgage market structural features. My results reveal that a higher adjustable-rate mortgage share and a higher homeownership rate interact to amplify the effects of monetary policy on economic activity due to smaller mortgage interest payments and a higher fraction of mortgaged homeowners operating in the market. I use the model to show that a euro-area-wide mortgage market requiring shared financial regulation decreases the heterogeneous effects of monetary policy by weakening the pass-through to average mortgage interest rates.
In the second chapter, I empirically show that monetary policy has heterogeneous effects across euro area countries. I provide evidence of strong correlations between cross-country monetary policy potency and housing and mortgage market institutions, namely the share of adjustable-rate mortgages and the homeownership rate. This study highlights that the housing and mortgage markets play an important role in determining the potency of monetary policy across countries in the eurozone.
The last chapter shows that house price changes are strongly correlated in the US data following monetary policy shocks. I build a New Keynesian model of the housing market where households choose the optimal amount of housing and mortgages. To accommodate realistic house price movements, I extend the housing market structure to include search frictions and house price rigidity so that the housing market clears through the relative fraction of successful buyers and sellers each period. I show that the house price momentum does not translate into slow movements of output and therefore it cannot explain the high degree of persistence found in the data following a contractionary monetary shock. I also highlight important redistributional effects between savers and borrowers in the economy. In particular, house price momentum coupled with the loan-to-value constraint forces the indebted households to cut their consumption for several quarters following a contractionary monetary shock.