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Homeowner Balance Sheets and Monetary Policy

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  • Aditya Aladangady

Abstract

This paper empirically identifies an important channel through which monetary policy affects consumer spending: homeowner balance sheets. A monetary loosening increases home values, thereby strengthening homeowner balance sheets and stimulating household spending due to a combination of collateral and wealth effects. The magnitude of these effects on a given household depends on local housing market characteristics such as local geography and regulation. Cities with the largest geographic and regulatory barriers to new construction see 3-4 percent responses in real house prices compared with unconstrained, elastic-supply cities where construction holds prices in check. Using non-public geocoded microdata from the Consumer Expenditures Survey, house price and consumption responses are compared across areas differing in local land availability and zoning laws to identify a marginal propensity to consume out of housing of 0.07. Homeowners with debt service ratios in the highest quartile have MPCs as high as 0.14 compared with negligible responses for those with low debt service ratios. This indicates a strong role for collateral effects, as opposed to pure wealth effects, in driving the relationship between home values and spending. I discuss the implications of these results for the aggregate effects and regional heterogeneity in responses to monetary shocks.

Suggested Citation

  • Aditya Aladangady, 2014. "Homeowner Balance Sheets and Monetary Policy," Finance and Economics Discussion Series 2014-98, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2014-98
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    Cited by:

    1. Serdar Ozkan & Kurt Mitman & Fatih Karahan & Aaron Hedlund, 2016. "Monetary Policy, Heterogeneity and the Housing Channel," 2016 Meeting Papers 663, Society for Economic Dynamics.
    2. Knut Are Aastveit & Bruno Albuquerque & André Anundsen, 2019. "Changing supply elasticities and regional housing booms," Working Paper 2019/8, Norges Bank.
    3. Xiaoqing Zhou, 2018. "Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment," 2018 Meeting Papers 795, Society for Economic Dynamics.
    4. James Cloyne & Clodomiro Ferreira & Paolo Surico, 2020. "Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism," Review of Economic Studies, Oxford University Press, vol. 87(1), pages 102-129.
    5. Christophe André, 2016. "Household debt in OECD countries: stylised facts and policy issues," Chapters from NBP Conference Publications, in: Hanna Augustyniak & Jacek Łaszek & Krzysztof Olszewski & Joanna Waszczuk (ed.), Papers presented during the Narodowy Bank Polski Workshop: Recent trends in the real estate market and its analysis - 2015 edition, chapter 2, pages v1, 33-85, Narodowy Bank Polski, Economic Research Department.
    6. Ben S. Bernanke, 2018. "The Real Effects of Disrupted Credit: Evidence from the Global Financial Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 251-342.
    7. Aaron Hedlund & Carlos Garriga, 2016. "Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession," 2016 Meeting Papers 1564, Society for Economic Dynamics.
    8. Zan Yang & Shuping Wu & Yanhao Shen, 2017. "Monetary Policy, House Prices, and Consumption in China: A National and Regional Study," International Real Estate Review, Global Social Science Institute, vol. 20(1), pages 23-49.
    9. Paolo Surico & Clodomiro Ferreira & James Cloyne, 2015. "Housing Debt and the Transmission of Monetary Policy," 2015 Meeting Papers 629, Society for Economic Dynamics.
    10. Greg Howard & Carl Liebersohn, 2018. "The Geography Channel of House Price Appreciation: Did the Decline in Manufacturing Partially Cause the Housing Boom?," 2018 Meeting Papers 925, Society for Economic Dynamics.
    11. Neil Bhutta & Benjamin J. Keys, 2016. "Interest Rates and Equity Extraction during the Housing Boom," American Economic Review, American Economic Association, vol. 106(7), pages 1742-1774, July.
    12. R. G Gelos & Tommaso Mancini Griffoli & Machiko Narita & Federico Grinberg & Umang Rawat & Shujaat Khan, 2019. "Has Higher Household Indebtedness Weakened Monetary Policy Transmission?," IMF Working Papers 2019/011, International Monetary Fund.
    13. Anna Zabai, 2017. "Household debt: recent developments and challenges," BIS Quarterly Review, Bank for International Settlements, December.
    14. Aaron Hedlund, 2015. "Failure to Launch: Housing, Debt Overhang, and the Inflation Option During the Great Recession," Working Papers 1515, Department of Economics, University of Missouri.
    15. Lenza, Michele & Slacalek, Jiri, 2018. "How does monetary policy affect income and wealth inequality? Evidence from quantitative easing in the euro area," Working Paper Series 2190, European Central Bank.

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    Keywords

    Consumption; housing; wealth effects; collateral; home equity; monetary policy;
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