The Housing Supply Channel of Monetary Policy

Abstract

We study the role of regional housing markets in the transmission of US monetary policy. Using a FAVAR model over 1999q1–2019q4, we find that differences in housing supply constraints explain part of the regional heterogeneity in the responses of US states to a contractionary monetary policy shock. Specifically, house prices and consumption respond more in supply-constrained states. Financial stability risks also increase more sharply in these areas as mortgage delinquencies and foreclosures surge, worsening banks’ balance sheets. Our findings stress the importance of regional housing supply conditions in assessing the macrofinancial effects of rising interest rates.

Keywords: Credit conditions, FAVAR, house prices, monetary policy, regional data, supply elasticities

JEL Classification: C23, E32, E52, R31