Regional house prices and the heterogeneous effects of monetary policy: Evidence from the U.K.
We investigate the dynamic effects of monetary policy shocks on the regional housing markets of the U.K. The econometric framework incorporates a Factor Augmented VAR, where the factors are estimated from the level data, and the shocks are identified using a proxy internally in the model. The empirical results reveal a heterogeneous impact of monetary policy shocks on regional house prices. We link the effectiveness of monetary shocks on regional housing with the level of housing affordability and the ability of households to borrow. In regions with low housing affordability, a large fraction of households are hand-to-mouth, and monetary policy transmits via general equilibrium effects. In such cases, we find sizable effects on the real economy but negligible effects on house prices. Conversely, monetary policy influences house prices considerably in regions where intertemporal substitution is powerful.
Government-sponsored intermediation and the bank-lending channel of monetary policy.
We examine the response of Government Sponsored Enterprises to monetary policy shocks and investigate their role in the transmission mechanism. We use VAR models and external instruments to show that GSEs expand their market share in response to monetary tightenings. A counterfactual analysis suggests that GSEs mitigate the effects of monetary policy shock on economic activity, prices and cost of credit. Conceptually, we link our findings with the bank-lending channel of monetary policy. In the event of a monetary contraction, depositors give up deposits and seek higher returns in the financial markets. Financial intermediaries seek liquidity via costly debt issuance to accommodate the deposit loss. The increase in the cost of funds contracts loan supply and amplifies the effects of monetary policy. We suggest that GSEs alter the effects of the bank-lending channel. GSEs expand their market share by purchasing banks' illiquid assets (mortgages). Hence, banks can substitute illiquid assets for liquid via GSEs, which allows them to keep the cost of liquid funds at relatively lower levels in at least two ways. First, via lowering the demand for funds in the funds market and second, by reducing the term structure of GSEs' debt. As a result, they cut the supply of loans proportionally less. This disrupts the amplification mechanism of monetary policy through bank lending.
Work in progress
Government spending and housing affordability in the euro area. (with Marta Rodrigues-Vives)