CORDIS
EU research results

CORDIS

English EN

MONETARY POLICY, HETEROGENEITY, AND THE HOUSING CHANNEL

Project information

Grant agreement ID: 897835

Status

Ongoing project

  • Start date

    1 June 2020

  • End date

    31 May 2021

Funded under:

H2020-EU.1.3.2.

  • Overall budget:

    € 87 836,64

  • EU contribution

    € 87 836,64

Coordinated by:

EUROPEAN UNIVERSITY INSTITUTE

Italy

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

Address

Via Dei Roccettini 9
50014 Fiesole

Italy

Activity type

Higher or Secondary Education Establishments

EU Contribution

€ 87 836,64

Project information

Grant agreement ID: 897835

Status

Ongoing project

  • Start date

    1 June 2020

  • End date

    31 May 2021

Funded under:

H2020-EU.1.3.2.

  • Overall budget:

    € 87 836,64

  • EU contribution

    € 87 836,64

Coordinated by:

EUROPEAN UNIVERSITY INSTITUTE

Italy