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Housing market heterogeneity in a monetary union

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  • Margarita Rubio

    ()
    (Banco de España)

Abstract

This paper studies the implications of cross-country housing market heterogeneity for a monetary union, also comparing the results with a flexible exchange rate and independent monetary policy setting. I develop a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore this issue. Results show that in a monetary union, consumption reacts more strongly to monetary policy shocks in countries with high loan-to-value ratios (LTVs), a high proportion of borrowers or variable-rate mortgages. As for asymmetric technology shocks, output and house prices increase by more in the country receiving the shock if it can conduct monetary policy independently. I also fi nd that after country-specific housing price shocks consumption does not only increase in the country where the shock takes place, there is an international transmission. From a normative perspective, I conclude that housing-market homogenization in a monetary union is not beneficial per se, only when it is towards low LTVs or predominantly fixed-rate mortgages. Furthermore, I show that when there are asymmetric shocks but identical housing markets, it is beneficial to form a monetary union with respect to having a flexible exchange rate regime. However, for the examples I consider, net benefits decrease substantially if there is LTV heterogeneity and are negative under different mortgage contracts.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/09/Fic/dt0916e.pdf
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0916.

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Length: 44 pages
Date of creation: Aug 2009
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Handle: RePEc:bde:wpaper:0916

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Keywords: Housing market; collateral constraint; monetary policy; monetary union;

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  1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  2. Tommaso Monacelli, 2008. "Optimal Monetary Policy with Collateralized Household Debt and Borrowing Constraints," NBER Chapters, National Bureau of Economic Research, Inc, in: Asset Prices and Monetary Policy, pages 103-146 National Bureau of Economic Research, Inc.
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  7. Kai Carstensen & Oliver Hülsewig & Timo Wollmershäuser, 2009. "Monetary Policy Transmission and House Prices: European Cross Country Evidence," Working Paper / FINESS, DIW Berlin, German Institute for Economic Research 7.4, DIW Berlin, German Institute for Economic Research.
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Cited by:
  1. Nikolay Hristov & Oliver Hülsewig & Timo Wollmershäuser, 2014. "Financial Frictions and Inflation Differentials in a Monetary Union," Manchester School, University of Manchester, University of Manchester, vol. 82(5), pages 549-595, 09.
  2. Michael Funke & Michael Paetz, 2011. "Housing Prices and the Business Cycle: An Empirical Application to Hong Kong," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21112b, Hamburg University, Department of Economics.
  3. Oriol Aspachs-Bracons & Pau Rabanal, 2010. "The drivers of housing cycles in Spain," SERIEs, Spanish Economic Association, Spanish Economic Association, vol. 1(1), pages 101-130, March.
  4. Margarita Rubio, 2014. "Macroprudential Policy Implementation in a Heterogeneous Monetary Union," Discussion Papers 2014/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  5. Kristine Vitola & Ludmila Fadejeva, 2010. "Asset Prices and Financial Frictions in Monetary Transmission: The Case of Latvia," Working Papers, Latvijas Banka 2010/03, Latvijas Banka.
  6. Philip Arestis & Ana Rosa González, 2014. "The Housing Market-Bank Credit Relationship: Some Thoughts on Its Causality," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(2), pages 145-160, March.

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