Working papers

     Monetary policy and house price heterogeneity: Evidence from the U.K.


This paper investigates the effects of monetary policy shocks on regional house prices in the U.K. The empirical results indicate significant heterogeneity in the impact of monetary policy on regional house prices. Focusing on the source of heterogeneity, the paper suggests a demand-side factor to be a major driver. The regions with relatively affordable housing exhibit higher sensitivity to monetary policy than those with less affordable housing. The prevailing view that region-specific housing supply constraints and regional housing supply elasticity are responsible for the heterogeneous response of regional house prices to monetary policy shocks is not confirmed by the empirical findings. 

     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