Housing Finance and Monetary Policy

51 Pages Posted: 18 Jul 2009

See all articles by Alessandro Calza

Alessandro Calza

European Central Bank (ECB)

Tommaso Monacelli

Bocconi University - Department of Economics

Livio Stracca

European Central Bank (ECB)

Date Written: July 15, 2009

Abstract

We study how the structure of housing finance affects the transmission of monetary policy shocks. We document three main facts: first, the features of residential mortgage markets differ markedly across industrialized countries; second, and according to a wide range of indicators, the transmission of monetary policy shocks to residential investment and house prices is significantly stronger in those countries with larger flexibility/development of mortgage markets; third, the transmission to consumption is stronger only in those countries where mortgage equity release is common and mortgage contracts are predominantly of the variable-rate type. We build a two-sector DSGE model with price stickiness and collateral constraints and analyze how the response of consumption and residential investment to monetary policy shocks is affected by alternative values of two institutional features: (i) down-payment rate; (ii) interest rate mortgage structure (variable vs. fixed rate). In line with our empirical evidence, the sensitivity of both variables to monetary policy shocks increases with lower values of the down-payment rate and is larger under a variable- rate mortgage structure.

Keywords: Housing finance, mortgage markets, collateral constraint, monetary policy

JEL Classification: E21, E44, E52.

Suggested Citation

Calza, Alessandro and Monacelli, Tommaso and Stracca, Livio, Housing Finance and Monetary Policy (July 15, 2009). ECB Working Paper No. 1069. Available at SSRN: https://ssrn.com/abstract=1429267

Alessandro Calza

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Tommaso Monacelli (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Livio Stracca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

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