European Commission logo
English English
CORDIS - EU research results
CORDIS

MONETARY POLICY, HETEROGENEITY, AND THE HOUSING CHANNEL

Project description

The connection between monetary policy and mortgages

Mortgages and monetary policies are linked. Debt results in a redistribution between lenders and borrowers. A contractionary monetary policy raises cost of borrowing, reducing liquidity in the housing market and bringing down house prices, which in turn increase the cost of borrowing. The EU-funded HANK-w-HOUSING project will shed light on any asymmetry between contractionary and expansionary monetary policy responses. It will also determine whether effectiveness of monetary policies depends on the distribution of mortgage debt. To study the issues, the project will develop a heterogeneous agent new Keynesian (HANK) model with a frictional housing market and nominal mortgage debt. It will match the empirical heterogeneity in home ownership, leverage and marginal propensity to consume across households.

Objective

The Great Recession has brought to light the importance of housing and household debt for the propagation of shocks in the macroeconomy. For a majority of households, owner-occupied housing represents the single most important asset in the household portfolio and is tied to the single largest liability—the mortgage. The broad objective of this project is to investigate the rich role that housing and nominal mortgage borrowing jointly play in the transmission of monetary policy. First, monetary policy induced-movements in house prices translate into consumption changes because of wealth effects. Second, a contractionary monetary shock raises the cost of borrowing which reduces the demand and as a result the liquidity of the housing market, further depressing house prices and further increases the cost of borrowing. Furthermore, nominal long-term mortgage debt implies that changes in monetary policy result in redistribution between lenders and borrowers and generate cash-flow effects that are larger for borrowing constrained households. In order to quantify these various mechanisms, we build a heterogenous agent New Keynesian (HANK) model with a frictional housing market and nominal mortgage debt. The model will be able to match the rich empirical heterogeneity in home ownership, leverage and marginal propensity to consume (MPC) across households. In particular, we aim to match the significant difference in MPC between highly leveraged households and less-leveraged ones that we document in the data. We will then use the model to answer the following questions: Is there any asymmetry between contractionary and expansionary monetary policy responses? Does effectiveness of the policy depend on the distribution of mortgage debt? How to manage a liquidity trap induced by a housing bust?

Coordinator

EUROPEAN UNIVERSITY INSTITUTE
Net EU contribution
€ 87 836,64
Address
VIA DEI ROCCETTINI 9
50014 Fiesole
Italy

See on map

Region
Centro (IT) Toscana Firenze
Activity type
Higher or Secondary Education Establishments
Links
Total cost
€ 87 836,64