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Regional heterogeneity and the refinancing channel of monetary policy

Author

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  • Martin Beraja
  • Andreas Fuster
  • Erik Hurst
  • Joseph Vavra

Abstract

We argue that the time-varying regional distribution of housing equity influences the aggregate consequences of monetary policy through its effects on mortgage refinancing. Using detailed loan-level data, we show that regional differences in housing equity affect refinancing and spending responses to interest rate cuts but that these effects vary over time with changes in the regional distribution of house price growth. We then build a heterogeneous household model of refinancing with both mortgage borrowers and lenders and use it to explore the aggregate implications for monetary policy arising from our regional evidence. We find that the 2008 equity distribution made spending in depressed regions less responsive to interest rate cuts, thus dampening aggregate stimulus and increasing regional consumption inequality, whereas the opposite occurred in some earlier recessions. Taken together, our results strongly suggest that monetary policy makers should track the regional distribution of equity over time.

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  • Martin Beraja & Andreas Fuster & Erik Hurst & Joseph Vavra, 2015. "Regional heterogeneity and the refinancing channel of monetary policy," Staff Reports 731, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:731
    Note: Former title: Regional heterogeneity and monetary policy
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    3. Cumming, Fergus & Hubert, Paul, 2019. "The role of households’ borrowing constraints in the transmission of monetary policy," Bank of England working papers 836, Bank of England, revised 06 Jan 2020.
    4. Gomes, Francisco J & Haliassos, Michael & Ramadorai, Tarun, 2020. "Household Finance," CEPR Discussion Papers 14502, C.E.P.R. Discussion Papers.
    5. Dimitris Christelis & Dimitris Georgarakos & Tullio Jappelli & Luigi Pistaferri & Maarten van Rooij, 2020. "Heterogeneous Wealth Effects," Working Papers 2020_20, Business School - Economics, University of Glasgow.
    6. Ben Moll, 2020. "The Research Agenda: Ben Moll on the Rich Interactions between Inequality and the Macroeconomy," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 21(2), November.
    7. Calvin He & Gianni La Cava, 2020. "The Distributional Effects of Monetary Policy: Evidence from Local Housing Markets," RBA Research Discussion Papers rdp2020-02, Reserve Bank of Australia.
    8. Johannes F. Wieland & Mu‐Jeung Yang, 2020. "Financial Dampening," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(1), pages 79-113, February.
    9. Giancarlo Corsetti & Joao B. Duarte & Samuel Mann, 2020. "One Money, Many Markets: Monetary Transmission and Housing Financing in the Euro Area," IMF Working Papers 2020/108, International Monetary Fund.
    10. Corina Boar & Denis Gorea & Virgiliu Midrigan, 2017. "Liquidity Constraints in the U.S. Housing Market," NBER Working Papers 23345, National Bureau of Economic Research, Inc.
    11. Greg Buchak & Gregor Matvos & Tomasz Piskorski & Amit Seru, 2018. "Beyond the Balance Sheet Model of Banking: Implications for Bank Regulation and Monetary Policy," NBER Working Papers 25149, National Bureau of Economic Research, Inc.
    12. Pizzuto, Pietro, 2020. "Regional effects of monetary policy in the U.S.: An empirical re-assessment," Economics Letters, Elsevier, vol. 190(C).
    13. Fergus Cumming & Paul Hubert, 2019. "The Role of Households' Borrowing Constraints in the Transmission of Monetary Policy This paper investigates how the transmission of monetary policy to the real economy depends on the distribution of ," Documents de Travail de l'OFCE 2019-20, Observatoire Francais des Conjonctures Economiques (OFCE).
    14. Archawa Paweenawat & Robert M. Townsend, 2019. "The Impact of Regional Isolationism: Disentangling Real and Financial Factors," PIER Discussion Papers 109, Puey Ungphakorn Institute for Economic Research, revised May 2019.
    15. Francesco D’Acunto & Daniel Hoang & Michael Weber, 2020. "Managing Households' Expectations with Unconventional Policies," NBER Working Papers 27399, National Bureau of Economic Research, Inc.
    16. Sumit Agarwal & Gene Amromin & Souphala Chomsisengphet & Tim Landvoigt & Tomasz Piskorski & Amit Seru & Vincent Yao, 2015. "Mortgage Refinancing, Consumer Spending, and Competition: Evidence from the Home Affordable Refinancing Program," NBER Working Papers 21512, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    monetary policy; regional inequality; mortgage refinancing; quantitative easing;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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