Monetary Policy, Housing Rents and Inflation Dynamics

Abstract

In this paper we study the effect of monetary policy shocks on housing rents. Our main finding is that, in contrast to house prices, housing rents increase in response to contractionary monetary policy shocks. We also find that, after a contractionary monetary policy shock, rental vacancies and the homeownership rate decline. This combination of results suggests that monetary policy may affect housing tenure decisions (own versus rent). In addition, we show that, with the exception of the shelter component, all other main components of the consumer price index (CPI) either decline in response to a contractionary monetary policy shock or are not responsive. These findings motivated us to study the statistical properties of alternative measures of inflation that exclude the shelter component. We find that measures of inflation that exclude shelter have most of the statistical properties of the widely used measures of inflation, such as the CPI and the price index for personal consumption expenditures (PCE), but have higher standard deviations and react more to monetary policy shocks. Finally, we show that the response of housing rents accounts for a large proportion of the "price puzzle" found in the literature.

What Drives House Price Cycles? International Experience and Policy Issues

“…house price appreciation. Since a rise in interest rates raises user costs both directly through the interest rate term and indirectly by reducing house price appreciation over time, these results accord with those of Dias and Duarte (2019).…”

Heteroskedastic Proxy Vector Autoregressions

“…We use the baseline setup and data from Dias and Duarte (2019) to investigate the time-invariance assumption underlying their study. 6 Given the sample period and looking at the VAR residuals in Figure 3, it is plausible to allow for a change in volatility around the time of the outbreak of the financial crisis in 2008/09.…”

“…We reconsider studies by Cesa-Bianchi, Thwaites and Vicondoa (2020) and Dias and Duarte (2019) which use heteroskedastic proxy VAR models and assume time-invariant impulse responses. We apply our test to confront the data with the time-invariance assumption.…”

“…The assumption of time-invariant impact effects is often implicitly made although heteroskedasticity is allowed for in inference by using heteroskedasticity-robust bootstrap methods for impulse responses, for example. Such an approach is used, for instance, in Mertens and Ravn (2013), Piffer and Podstawski (2018), Dias and Duarte (2019) and Alessi and Kerssenfischer (2019). Other authors using proxy VARs consider variables in their models that may induce heteroskedasticity and they assume that it does not affect the impulse responses (e.g., Gertler and Karadi (2015) and Caldara and Herbst (2019)).…”

“…This outcome shows that in empirical studies, it is advisable to test the assumption of time-invariant impulse responses and do not take it for granted. Our second example is based on Dias and Duarte (2019). It investigates the impact of monetary policy shocks on housing rents in the United States of America (US).…”