Regional Heterogeneity and the Refinancing Channel of Monetary Policy

73 Pages Posted: 19 Jun 2015 Last revised: 18 Mar 2018

See all articles by Martin Beraja

Martin Beraja

University of Chicago

Andreas Fuster

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Erik Hurst

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Joseph Vavra

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: March 1, 2018

Abstract

We argue that the time-varying regional distribution of housing equity influences the aggregate consequences of monetary policy through its effects on mortgage refinancing. Using detailed loan-level data, we show that regional differences in housing equity affect refinancing and spending responses to interest rate cuts but that these effects vary over time with changes in the regional distribution of house price growth. We then build a heterogeneous household model of refinancing with both mortgage borrowers and lenders and use it to explore the aggregate implications for monetary policy arising from our regional evidence. We find that the 2008 equity distribution made spending in depressed regions less responsive to interest rate cuts, thus dampening aggregate stimulus and increasing regional consumption inequality, whereas the opposite occurred in some earlier recessions. Taken together, our results strongly suggest that monetary policy makers should track the regional distribution of equity over time.

Keywords: monetary policy, regional inequality, quantitative easing, mortgage refinancing

JEL Classification: E21, E52, G21

Suggested Citation

Beraja, Martin and Fuster, Andreas and Hurst, Erik and Vavra, Joseph, Regional Heterogeneity and the Refinancing Channel of Monetary Policy (March 1, 2018). FRB of New York Staff Report No. 731, Available at SSRN: https://ssrn.com/abstract=2619932 or http://dx.doi.org/10.2139/ssrn.2619932

Martin Beraja

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Andreas Fuster (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Chamberonne
Bâtiment Extranef
CH-1015 Lausanne
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Erik Hurst

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joseph Vavra

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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