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This paper quantifies the importance of heterogeneity in regional housing markets for the conduct of monetary policy using a new model called a heterogeneous-agent VAR (HAVAR), which generalizes conventional macro VARs. The HAVAR model integrates a national monetary authority and financial market with regional housing markets, imposing exact aggregation. Monetary policy is transmitted to the national to regional markets via the mortgage rate. Although the HAVAR model is based on linear regional VARs, 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 effects of monetary policy on the economy depend on the extent and nature of regional heterogeneity, which vary over time. Using longitudinal data for a subsample of detailed U.S. regions, we estimate the effects of time variation and state dependence on the dynamic responses of the HAVAR model. The estimated model provides plausible and tangible explanations for "long and variable" lags in monetary policy. To provide a policy-relevant illustration, we show how coastal housing booms influence the efficacy of monetary policy.JEL Codes: E22, E52, R21, R31

Abstract:Since the mid-1990s, the U.S. payment system has been undergoing a paper-toelectronics transformation featuring a significant decline in the number of paper checks written for payment. The timing and magnitude of the transformation have been surprising, and the future direction of payments is quite uncertain, largely because of a lack of data and research that explain why agents choose payment instruments. Using data from new surveys on consumer payment behavior, this paper shows that the large and relatively sudden decline in aggregate check use is not spread evenly among consumers despite the widespread availability of cheaper, more convenient, and better-timed electronic alternatives. Fundamental characteristics of payment instruments -cost, convenience, payment timing, and the like -are much more important determinants of payment choice than demographics or determinants of money demand, and these characteristics raise the cross-section explanatory power of econometric models of payment demand by three-fold or more.

This paper contributes to an understanding of internationally generated adjustment costs by demonstrating a statistically significant and economically relevant effect of the real exchange rate on job creation and job destruction in U.S. manufacturing industries over the period 1973 to 1993. The responsiveness of these gross job flows to the real exchange rate reflects pervasive heterogeneity with respect to international conditions across firms, even within narrowly defined industries. We document this heterogeneity and show that the responsiveness of job flows to movements in the real exchange rate varies with the industry's openness to international trade. We also show an asymmetry in the responsiveness of job flows to the real exchange rate; appreciations play a significant role in job destruction, but job flows do not respond significantly to dollar depreciations.

This paper contributes to an understanding of internationally generated adjustment costs by demonstrating a statistically significant and economically relevant effect of the real exchange rate on job creation and job destruction in U.S. manufacturing industries over the period 1973 to 1993. The responsiveness of these gross job flows to the real exchange rate reflects pervasive heterogeneity with respect to international conditions across firms, even within narrowly defined industries. We document this heterogeneity and show that the responsiveness of job flows to movements in the real exchange rate varies with the industry's openness to international trade. We also show an asymmetry in the responsiveness of job flows to the real exchange rate; appreciations play a significant role in job destruction, but job flows do not respond significantly to dollar depreciations.