Monetary Policy, Housing Investment, and Heterogeneous Regional Markets

FRB of Boston Working Paper No. 00-1

48 Pages Posted: 15 May 2000

See all articles by Michael C. Fratantoni

Michael C. Fratantoni

Washington Mutual; Foster School of Business, University of Washington

Scott D. Schuh

Federal Reserve Bank of Boston - Research Department

Date Written: January 2000

Abstract

This paper quantifies the importance of heterogeneity in regional housing markets for the conduct of monetary policy using a new model called an aggregation VAR (AVAR). The model integrates a national financial market with regional housing markets, imposing all exact aggregation conditions. Monetary policy is transmitted to the real economy through the mortgage rate. The AVAR model is based on linear VARs, but its aggregate impulse responses exhibit two nonlinearities: (1) time variation stemming from aggregation over heterogeneous regions, and (2) state dependence on initial economic conditions in regions. Thus, the effect of monetary policy on the real economy depends on the extent and nature of regional heterogeneity, which vary over time. Using longitudinal data for detailed U.S. regions, we estimate the effects of time variation and state dependence on the dynamic responses of the AVAR model. These estimates, and aggregation bias, provide plausible and tangible explanations for "long and variable" lags in monetary policy. As an example, we show how the AVAR model can simulate the effects of coastal housing booms on the efficacy of monetary policy.

JEL Classification: E22, E52, R21, R31

Suggested Citation

Fratantoni, Michael and Schuh, Scott, Monetary Policy, Housing Investment, and Heterogeneous Regional Markets (January 2000). FRB of Boston Working Paper No. 00-1. Available at SSRN: https://ssrn.com/abstract=214870 or http://dx.doi.org/10.2139/ssrn.214870

Michael Fratantoni

Washington Mutual ( email )

United States

Foster School of Business, University of Washington ( email )

Box 353200
Seattle, WA 98195-3200
United States

Scott Schuh (Contact Author)

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Ave.
Boston, MA 02210
United States
617-973-3941 (Phone)
617-619-7541 (Fax)

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