One Money, Many Markets: Monetary Transmission and Housing Financing in the Euro Area

IMF Working Papers, June 26, 2020

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Canonical URL: One Money, Many Markets: Monetary Transmission and Housing Financing in the Euro Area

Authors: Giancarlo Corsetti, Joao B. Duarte, Samuel Mann
Date: June 26, 2020
Core objective: Study the transmission of monetary shocks across euro-area countries.
Approach: Use a dynamic factor model and high-frequency identification.
Key methodological contribution: Develop a methodology to assess the degree of heterogeneity across countries.
Primary finding (empirical): Heterogeneity is low in financial variables and output, but significant in consumption, consumer prices, and variables related to local housing and labor markets.
Primary finding (model): A small open economy model with a housing sector calibrated to Spain shows that varying the share of adjustable-rate mortgages and loan-to-value ratios explains up to one-third of the cross-country heterogeneity in the responses of output and private consumption.

Empirical techniques:
- Dynamic factor model.
- High-frequency identification.
Heterogeneity assessment:
- A dedicated methodology is developed to quantify the degree of cross-country heterogeneity in transmission.

Cross-country heterogeneity:
- Low heterogeneity in financial variables and output.
- Significant heterogeneity in:
- Consumption.
- Consumer prices.
- Variables related to local housing and labor markets.
Model calibration and explanatory power:
- A small open economy model featuring a housing sector is calibrated to Spain.
- Varying two housing-finance features—share of adjustable-rate mortgages and loan-to-value ratios—explains up to one-third of cross-country heterogeneity in the responses of:
- Output.
- Private consumption.