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Monetary policy, housing investment, and heterogeneous regional markets

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  • Michael Fratantoni
  • Scott Schuh

Abstract

This paper quantifies the importance of heterogeneity in regional housing markets for the conduct of monetary policy using a new model called an aggregation VAR (AVAR). The model integrates a national financial market with regional housing markets, imposing all exact aggregation conditions. Monetary policy is transmitted to the real economy through the mortgage rate. The AVAR model is based on linear VARs, but its aggregate impulse responses exhibit two nonlinearities: (1) time variation stemming from aggregation over heterogeneous regions, and (2) state dependence on initial economic conditions in regions. Thus, the effect of monetary policy on the real economy depends on the extent and nature of regional heterogeneity, which vary over time. Using longitudinal data for detailed U.S. regions, we estimate the effects of time variation and state dependence on the dynamic responses of the AVAR model. These estimates, and aggregation bias, provide plausible and tangible explanations for "long and variable" lags in monetary policy. As an example, we show how the AVAR model can simulate the effects of coastal housing booms on the efficacy of monetary policy.

Suggested Citation

  • Michael Fratantoni & Scott Schuh, 2000. "Monetary policy, housing investment, and heterogeneous regional markets," Working Papers 00-1, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbwp:00-1
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    References listed on IDEAS

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    Cited by:

    1. Holly, Sean & Pesaran, M. Hashem & Yamagata, Takashi, 2010. "A spatio-temporal model of house prices in the USA," Journal of Econometrics, Elsevier, vol. 158(1), pages 160-173, September.
    2. Hallberg, Daniel & Johansson, Per, 2002. "Turnover and Price in the Housing Market: Causation, Association or Independence?," Working Paper Series 2002:12, Uppsala University, Department of Economics.
    3. Lynn Elaine Browne, 2000. "National and regional housing patterns," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 31-57.

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    Keywords

    Monetary policy ; Housing;

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