Real Effects of the ECB's Quantitative Easing: A Housing Portfolio Channel

Abstract

We propose a new housing portfolio channel through which a central bank's quantitative easing (QE) can affect local consumption and hence output growth. To illustrate the working of this channel of QE transmission, we set up a simple portfolio model with segmented local housing markets. In our model, a national financial intermediary manages wealth on behalf of local households and responds to QE interventions by rebalancing its portfolio from bonds to houses. As a result, house prices increase, expected future returns fall, and the total household portfolio return declines, boosting the local economy by stimulating current consumption. The more scarce is land supply, the tighter the local housing supply, and the stronger the QE impact on the portfolio return and hence consumption and output growth. We investigate this channel empirically in German region-level data. Identification exploits the exogenous variation in land supply scarcity across regions to construct a measure of exposure to the housing portfolio channel. We estimate that a one-standard-deviation increase in the size of the ECB's balance sheet raises GDP growth in the most exposed regions by 2-3 percentage points more than in the least exposed ones, cumulatively, during the 2010-2017 period. The housing portfolio channel can account for 60-80% of this regional growth differential, with the remaining portion accounted for by the term spread and credit and collateral channels.

Keywords: Unconventional Monetary Policy, Housing Portfolio Channel, EONIA, Quantitative Easing, Regional Business Cycles, Germany, Real Estate

JEL Classification: E3, E4, E5, R3