One Money, Many Markets

Abstract

We study heterogeneity in the transmission of monetary shocks across euro-area countries using a dynamic factor model and high-frequency identification. Deploying a novel methodology to assess the degree of heterogeneity, we find it to be low in financial variables and output but significant in consumption, consumer prices, and variables related to local housing and labour markets. We show that a large proportion of the variation in the responses to monetary shocks can be accounted for by differences in some characteristics of these markets across EA member countries: the share of adjustable mortgage contracts, homeownership rates, shares of hand-to-mouth and wealthy hand-to-mouth consumers, as well as wage rigidity.

The Housing Supply Channel of Monetary Policy

“…First, we find significant heterogeneity in the transmission of an aggregate US contractionary monetary policy shock to the US states. The heterogeneity is particularly large among housing market variables, supporting recent findings in the literature (Fischer et al 2021, Aastveit and Anundsen 2022, Cooper et al 2022, Corsetti et al 2022, Koeniger et al 2022, Aastveit et al 2023. Moreover, as homeownership costs increase due to the tightening of monetary policy, we find that house prices fall while rent prices increase in most states, suggesting a reallocation of demand from the owner-occupied market to the rental market Duarte 2019, 2022).…”

“…8 Differences in the housing market structure, which we explore later, may explain part of this heterogeneity. Overall, our results confirm a large degree of heterogeneity in the transmission of monetary policy or demand shocks to the housing market (Paciorek 2013, Fischer et al 2021, Aastveit and Anundsen 2022, Corsetti et al 2022, Cooper et al 2022, Koeniger et al 2022, Aastveit et al 2023.…”

“…As outlined in Bernanke et al (2005), the FAVAR model can be estimated in two ways: (i) using a fully likelihood-based (Bayesian) approach, in which the unobserved factors are sampled alongside the other model parameters; or (ii) by a two-step approach that first estimates the unobserved factors and then the remaining parameters conditional on these factors. In this paper, we follow Stock and Watson (2005), Korobilis (2013), andCorsetti et al (2022) and use the two-step approach that is based on principal component analysis, which is easier to implement and computationally less demanding.…”

“…In this section we investigate the relevance of possible channels and state-specific characteristics in explaining the heterogeneous transmission of monetary policy. We follow the spirit of Corsetti et al (2022), who look at institutional characteristics of selected euro area member states and their correlations with the strength of euro area monetary policy transmission. Given our larger cross section of US states, we focus on the average responses of states, grouping them by state-specific characteristics.…”

“…Our contribution is to document empirically that monetary policy may influence housing tenure decisions heterogeneously across states, conditional on differences in supply constraints, housing market segmentation, and household debt imbalances. Finally, our paper can be placed in the literature documenting regional and cross-country differences in the responses of macroeconomic variables to monetary policy (Carlino and DeFina 1998, Fratantoni and Schuh 2003, Francis et al 2012, Calza et al 2013, Albuquerque 2019, Fischer et al 2021, Corsetti et al 2022, Aastveit and Anundsen 2022, Aastveit et al 2023, Pica 2023.…”