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Regional Heterogeneity and Monetary Policy

Author

Listed:
  • Joseph Vavra

    (University of Chicago)

  • Erik Hurst

    (University of Chicago)

  • Andreas Fuster

    (Federal Reserve Bank of New York)

  • Martin Beraja

    (MIT and Princeton University)

Abstract

We argue that the time-varying regional distribution of housing equity shapes the aggregate consequences of monetary policy through its influence on mortgage refinancing. Using detailed loan-level data, we begin by showing that: (i) the refinancing response to interest rate cuts is strongly affected by regional differences in housing equity, and (ii) both regional differences in refinancing and overall refinancing vary over time with changes in the regional distribution of house price growth and unemployment. Then, we build a heterogeneous household model of refinancing in order to derive aggregate implications of monetary policy 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.

Suggested Citation

  • Joseph Vavra & Erik Hurst & Andreas Fuster & Martin Beraja, 2017. "Regional Heterogeneity and Monetary Policy," 2017 Meeting Papers 270, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:270
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    References listed on IDEAS

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    Cited by:

    1. Hintermaier, Thomas & Koeniger, Winfried, 2018. "Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission," Economics Working Paper Series 1806, University of St. Gallen, School of Economics and Political Science, revised Nov 2019.
    2. Koeniger, Winfried & Lennartz, Benedikt & Ramelet, Marc-Antoine, 2022. "On the transmission of monetary policy to the housing market," European Economic Review, Elsevier, vol. 145(C).
    3. Manfred M. Fischer & Florian Huber & Michael Pfarrhofer & Petra Staufer‐Steinnocher, 2021. "The Dynamic Impact of Monetary Policy on Regional Housing Prices in the United States," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(4), pages 1039-1068, December.
    4. Bruno Albuquerque, 2019. "One Size Fits All? Monetary Policy and Asymmetric Household Debt Cycles in U.S. States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(5), pages 1309-1353, August.
    5. Piskorski, Tomasz & Seru, Amit, 2021. "Debt relief and slow recovery: A decade after Lehman," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1036-1059.
    6. Anthony A. Defusco & John Mondragon, 2020. "No Job, No Money, No Refi: Frictions to Refinancing in a Recession," Journal of Finance, American Finance Association, vol. 75(5), pages 2327-2376, October.
    7. Xiaoqing Zhou, 2018. "Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment," 2018 Meeting Papers 795, Society for Economic Dynamics.
    8. Andreas Fuster & Matthew Plosser & Philipp Schnabl & James Vickery, 2019. "The Role of Technology in Mortgage Lending," Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1854-1899.
    9. Chi‐Young Choi & Horag Choi & Alexander Chudik, 2020. "Regional inequality in the U.S.: Evidence from city‐level purchasing power," Journal of Regional Science, Wiley Blackwell, vol. 60(4), pages 738-774, September.
    10. Nina Boyarchenko & Valentin Haddad & Matthew Plosser, 2016. "The Federal Reserve and market confidence," Staff Reports 773, Federal Reserve Bank of New York.
    11. Luck, Stephan & Zimmermann, Tom, 2020. "Employment effects of unconventional monetary policy: Evidence from QE," Journal of Financial Economics, Elsevier, vol. 135(3), pages 678-703.
    12. repec:bin:bpeajo:v:49:y:2019:i:2018-01:p:429-513 is not listed on IDEAS
    13. Chen Lian & Yueran Ma & Carmen Wang, 2019. "Low Interest Rates and Risk-Taking: Evidence from Individual Investment Decisions," Review of Financial Studies, Society for Financial Studies, vol. 32(6), pages 2107-2148.
    14. Cravino, Javier & Lan, Ting & Levchenko, Andrei A., 2020. "Price stickiness along the income distribution and the effects of monetary policy," Journal of Monetary Economics, Elsevier, vol. 110(C), pages 19-32.
    15. Tomasz Piskorski & Amit Seru, 2018. "Mortgage Market Design: Lessons from the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(1 (Spring), pages 429-513.
    16. Matteo Benetton & Philippe Bracke & João F Cocco & Nicola Garbarinoifo, 2022. "Housing Consumption and Investment: Evidence from Shared Equity Mortgages," Review of Financial Studies, Society for Financial Studies, vol. 35(8), pages 3525-3573.
    17. Atif Mian & Amir Sufi, 2018. "Finance and Business Cycles: The Credit-Driven Household Demand Channel," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 31-58, Summer.
    18. Manfred M. Fischer & Florian Huber & Michael Pfarrhofer & Petra Staufer-Steinnocher, 2018. "The dynamic impact of monetary policy on regional housing prices in the US: Evidence based on factor-augmented vector autoregressions," Papers 1802.05870, arXiv.org.
    19. Cumming, Fergus, 2018. "Mortgages, cash-flow shocks and local employment," Bank of England working papers 773, Bank of England.
    20. Adam M. Guren & Arvind Krishnamurthy & Timothy J. Mcquade, 2021. "Mortgage Design in an Equilibrium Model of the Housing Market," Journal of Finance, American Finance Association, vol. 76(1), pages 113-168, February.
    21. Matteo Benetton & Davide Fantino, 2018. "Competition and the pass-through of unconventional monetary policy: evidence from TLTROs," Temi di discussione (Economic working papers) 1187, Bank of Italy, Economic Research and International Relations Area.
    22. Chi-Young Choi & Alexander Chudik, 2017. "Geographic Inequality of Economic Well-being among U.S. Cities: Evidence from Micro Panel Data," Globalization Institute Working Papers 330, Federal Reserve Bank of Dallas.
    23. Segev, Nimrod & Schaffer, Matthew, 2020. "Monetary policy, bank competition and regional credit cycles: Evidence from a quasi-natural experiment," Journal of Corporate Finance, Elsevier, vol. 64(C).
    24. François Geerolf & Thomas Grjebine, 2018. "Property Tax Shocks and Macroeconomics," Working Papers 2018-03, CEPII research center.

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis

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