Homeownership, Informality and the Transmission of Monetary Policy

European Banking Center Discussion Paper Series No. 2014-005

CentER Discussion Paper Series No. 2014-045

26 Pages Posted: 28 Aug 2014

See all articles by Ceyhun Elgin

Ceyhun Elgin

Bogazici University

Burak Uras

Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Economics

Date Written: August 28, 2014

Abstract

Cross-country aggregate data exhibits a strong (positive) relationship between the size of the informal employment and aggregate homeownership rates. We investigate this empirical observation using a cash-in-advance model with housing markets and argue that the rate of inflation is important in explaining the nexus between informality and homeownership rates. Specifically, we uncover a novel monetary transmission mechanism and show that households with informal employment desire to economize on their short-term cash usage and avoid periodic rental payments when (i) informality is associated with constrained business investment finance, and (ii) inflation expectations are high. Our empirical and theoretical findings highlight an important interaction between the conduct of monetary policy and the performance of housing markets.

Keywords: Cash-In-Advance, Informality, Cross-Country Data, Monetary Transmission

JEL Classification: E26; E41; E44

Suggested Citation

Elgin, Ceyhun and Uras, Burak R., Homeownership, Informality and the Transmission of Monetary Policy (August 28, 2014). European Banking Center Discussion Paper Series No. 2014-005, CentER Discussion Paper Series No. 2014-045, Available at SSRN: https://ssrn.com/abstract=2488419 or http://dx.doi.org/10.2139/ssrn.2488419

Ceyhun Elgin (Contact Author)

Bogazici University ( email )

Bebek, İstanbul 34342
Turkey

Burak R. Uras

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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