IMF Working Papers

The Housing Supply Channel of Monetary Policy

By Bruno Albuquerque, Martin Iseringhausen, Frederic Opitz

February 2, 2024

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Bruno Albuquerque, Martin Iseringhausen, and Frederic Opitz. The Housing Supply Channel of Monetary Policy, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study the role of regional housing markets in the transmission of US monetary policy. Using a FAVAR model over 1999q1–2019q4, we find sizeable heterogeneity in the responses of US states to a contractionary monetary policy shock. Part of this regional variation is due to differences in housing supply elasticities, household debt overhang, and housing wealth (volatility). Our analysis indicates that house prices and consumption respond more in supply-inelastic states and in states with large household debt imbalances, where negative housing wealth effects bite more strongly and borrowing constraints become more binding. Moreover, financial stability risks increase sharply in these areas as mortgage delinquencies and foreclosures surge, worsening banks’ balance sheets. Finally, monetary policy may have a stronger effect on housing tenure decisions in supply-inelastic states, where the homeownership rate and price-to-rent ratios decline by more. Our findings stress the importance of regional housing supply conditions in assessing the macrofinancial effects of rising interest rates.

Subject: Consumption, Economic theory, Financial institutions, Housing, Housing prices, Mortgages, National accounts, Prices, Supply elasticity

Keywords: Consumption, Contractionary monetary policy shock, Credit conditions, Europe, FAVAR, Global, House prices, Housing, Housing prices, Housing supply channel, Housing wealth, Monetary policy, Mortgages, Regional data, Supply condition, Supply elasticities, Supply elasticity, Wealth effects bite

Publication Details

  • Pages:

    60

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2024/023

  • Stock No:

    WPIEA2024023

  • ISBN:

    9798400264498

  • ISSN:

    1018-5941

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