Monetary Policy and Homeownership: Empirical Evidence, Theory, and Policy Implications

We study the interplay between monetary policy and housing tenure decisions and how this channel affects monetary policy transmission in the business cycle. We show that monetary policy shocks are an important driver of fluctuations in the aggregate rate of homeownership in the United States, accounting for as much as 35% of its long-run variation. We also provide empirical evidence that monetary policy affects housing tenure choice decisions at the household level and affects housing supply for rental and ownership. We propose a standard two-agent New Keynesian model extended with a housing tenure decision and adjustment costs on housing supply to account for these empirical facts. Using the model, we show that homeownership is a relevant channel of monetary policy transmission and entails redistributive implications. Furthermore, we find that a monetary authority that reacts to price indexes that include housing rents, such as the consumer price index, generates excess price and output volatility.