Monetary Policy and Homeownership: Empirical Evidence,Theory, and Policy Implications

66 Pages Posted: 24 May 2022

See all articles by Daniel A. Dias

Daniel A. Dias

Board of Governors of the Federal Reserve System

João B. Duarte

Nova School of Business and Economics

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Date Written: May 1, 2022

Abstract

We show that monetary policy affects homeownership decisions and argue that this effect is an important and overlooked channel of monetary policy transmission. We first document that monetary policy shocks are a substantial driver of fluctuations in the U.S. homeownership rate and that monetary policy affects households' housing tenure choices. We then develop and calibrate a two-agent New Keynesian model that can replicate the estimated transmission of monetary policy shocks to homeownership rates and housing rents. We find that the calibrated model provides an explanation to the "price puzzle" and delivers two important results with policy implications. First, the homeownership decision channel amplifies the redistributive effects of monetary policy, with contractionary shocks benefiting more outright homeowners and disadvantaging more renters and homeowners with a mortgage. Second, a monetary authority that reacts to a price index that includes housing rents generates excess house price, rents, and output volatility and larger real effects.

Keywords: Monetary policy, Homeownership, Housing rents and housing prices, Inflation dynamics, Housing tenure choice, “Price puzzle

JEL Classification: E31, E43, R21

Suggested Citation

Dias, Daniel A. and Duarte, João B., Monetary Policy and Homeownership: Empirical Evidence,Theory, and Policy Implications (May 1, 2022). International Finance Discussion Paper No. 1344, Available at SSRN: https://ssrn.com/abstract=4118179 or http://dx.doi.org/10.17016/IFDP.2022.1344

Daniel A. Dias (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

João B. Duarte

Nova School of Business and Economics ( email )

Campus de Carcavelos
Cascais
Portugal

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