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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.

Suggested Citation

  • Margarita Rubio, 2009. "Housing market heterogeneity in a monetary union," Working Papers 0916, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0916
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    References listed on IDEAS

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    Cited by:

    1. Brzoza-Brzezina, Michał & Kolasa, Marcin & Makarski, Krzysztof, 2015. "Macroprudential policy and imbalances in the euro area," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 137-154.
    2. Kristine Vitola & Ludmila Fadejeva, 2010. "Asset Prices and Financial Frictions in Monetary Transmission: The Case of Latvia," Working Papers 2010/03, Latvijas Banka.
    3. repec:kap:openec:v:29:y:2018:i:2:d:10.1007_s11079-017-9452-1 is not listed on IDEAS
    4. Oriol Aspachs-Bracons & Pau Rabanal, 2010. "The drivers of housing cycles in Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 1(1), pages 101-130, March.
    5. repec:wsi:serxxx:v:62:y:2017:i:01:n:s0217590817400057 is not listed on IDEAS
    6. repec:eee:ecosys:v:42:y:2018:i:1:p:75-90 is not listed on IDEAS
    7. Funke, Michael & Paetz, Michael, 2013. "Housing prices and the business cycle: An empirical application to Hong Kong," Journal of Housing Economics, Elsevier, vol. 22(1), pages 62-76.
    8. Gabriele Galati & Federica Teppa & Rob Alessie, 2013. "Heterogeneity in house price dynamics," DNB Working Papers 371, Netherlands Central Bank, Research Department.
    9. Nikolay Hristov & Oliver Hülsewig & Timo Wollmershäuser, 2014. "Financial Frictions and Inflation Differentials in a Monetary Union," Manchester School, University of Manchester, vol. 82(5), pages 549-595, September.
    10. Michal Rubaszek & Margarita Rubio, 2017. "Does rental housing market stabilize the economy? A micro and macro perspective," Discussion Papers 2017/06, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    11. Charles Rahal,, 2016. "Housing markets and unconventional monetary policy," Journal of Housing Economics, Elsevier, vol. 32(C), pages 67-80.
    12. Guangling Liu & Fernando Garcia-Barragan, 2017. "Capital Controls and Foreign Currency Denomination," 2017 Meeting Papers 415, Society for Economic Dynamics.
    13. Nadav Ben Zeev & Ohad Raveh, 2017. "Monetary Policy, Fisal Federalism, and Capital Intensity," OxCarre Working Papers 181, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    14. Rubio, Margarita & Carrasco-Gallego, José A., 2016. "Coordinating macroprudential policies within the Euro area: The case of Spain," Economic Modelling, Elsevier, vol. 59(C), pages 570-582.
    15. Philip Arestis & Ana Rosa González, 2014. "The Housing Market-Bank Credit Relationship: Some Thoughts on Its Causality," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(2), pages 145-160, March.
    16. 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).
    17. Margarita Rubio & Mariarosaria Comunale, 2017. "Lithuania in the Euro Area: Monetary Transmission and Macroprudential Policies," Eastern European Economics, Taylor & Francis Journals, vol. 55(1), pages 29-49, January.
    18. repec:eee:jhouse:v:37:y:2017:i:c:p:1-21 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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