Monetary Policy, Housing, and Heterogeneous Regional Markets

Abstract

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

The Cross-Sectional Dispersion of Commercial Real Estate Returns and Rent Growth: Time Variation and Economic Fluctuations

“…The intuition for this argument is based on the fact that the propagation and persistence of business cycle fluctuations vary across regions because of corresponding differences in industry composition, in firm sizes, and differences in the availability of funds across states (Carlino and DeFina (2003), Owyang, Piger, and Wall (2003), Fratantoni and Schuh (2003), Owyang and Wall (2004)). As a case in point, the 2001 recession was felt heavily in the San Francisco office market, which posted an annual return of -11.8%, while during that same year office prices in Oklahoma City increased by 11.5%.…”

The Response of U.S. States to Exogenous Oil Supply and Monetary Policy Shocks

“…They argue that "these 19 sub-regions provide enough cross-sectional variation to discern the roles of different monetary channels, while allowing estimation in a single, tractable system" (page 1191). Barth and Ramey (2002), Fratantoni and Schuh (2003), Irvine and Schuh (2005), and Beckworth (2010) propose an ISSN 1948-5433 2013 alternative approach whereby restrictions are placed on the VAR such that each state's economy is assumed to respond to, but not to affect contiguous states.…”

Regional Heterogeneity and Monetary Policy

“…There is also a growing literature using aggregate VARs to document that responses to monetary policy vary with regional housing markets (Fratantoni and Schuh, 2003) and household debt (Alpanda and Zubairy, 2017).…”