Housing markets drive varied monetary policy effects across euro area
A Banca d'Italia working paper by Stefano Pica examines why monetary policy affects euro area member states unevenly. The research focuses on how homeownership rates, adjustable-rate mortgages, and loan-to-value ratios drive these heterogeneous effects.
Housing market features amplify policy impact
The study identifies homeownership rates (HoR), adjustable-rate mortgage (ARM) shares, and loan-to-value (LTV) ratios as key drivers of varied monetary policy transmission across the euro area.
Economies with higher values in these characteristics exhibit stronger consumption and mortgage rate responses to policy shocks.
For instance, ARM shares range from under 10 percent in France to over 90 percent in Portugal, Finland, and Lithuania, while HoR varies from 44 percent in Germany to over 80 percent in Lithuania and Slovakia.
The paper's two-country New Keynesian model, calibrated to euro area data, reproduces this observed heterogeneity.
A temporary 25 basis point policy rate cut leads to aggregate consumption responses ranging from 0.6 to 1.8 percent and mortgage rate troughs from -0.03 to -0.25 percentage points across member states.
The mortgage credit channel emerges as the most significant factor explaining these cross-country differences.
Unpacking transmission channels
This research was conducted within the 'Challenges for Monetary Policy Transmission in a Changing World Network' (ChaMP), a collaboration between the European Central Bank and national central banks.
ChaMP aims to update understanding of monetary transmission in light of recent shocks, structural changes, and an expanded policy toolkit.
The paper develops a quantitative currency-union New Keynesian model with household heterogeneity, distinguishing between constrained borrowers and patient savers.
It incorporates both fixed-rate and adjustable-rate mortgages, and calibrates the model to match aggregate euro area moments and country-specific housing market features.
This framework allows for a detailed simulation of common monetary policy shocks.
Heterogeneity's persistent challenge
This paper provides crucial empirical and model-based evidence for long-suspected heterogeneity in monetary policy transmission.
While it quantifies the dominant role of the mortgage credit channel, it also starkly illustrates the limited effectiveness of single macroprudential tools like LTV ratios to fully address this complex, multi-faceted problem.
The findings underscore the persistent challenge for the ECB in achieving uniform stabilization across a diverse monetary union.