Housing wealth and cash flow shape monetary policy transmission
A new European Central Bank working paper quantifies the role of housing wealth in the transmission of monetary policy to consumption across 20 advanced economies. The study finds that cross-country differences are largely driven by the cash-flow channel.
Housing wealth and cash flow drive consumption response
This paper quantifies the role of housing wealth in the transmission of monetary policy to consumption across 20 advanced economies.
Using Bayesian VAR models, the authors identify structural shocks with a novel combination of sign and maximum forecast error variance restrictions.
They isolate the housing wealth channel through counterfactual impulse responses.
The study finds that the housing wealth multiplier—the sensitivity of consumption to exogenous house price changes—is strongly correlated with outright homeownership rates and is higher for durable consumption.
Cross-country differences in the monetary policy transmission to consumption are largely driven by the cash-flow channel, even after controlling for the housing wealth effect.
These insights are derived from a consistent modelling strategy across a broad sample of advanced economies.
Heterogeneity in housing markets shapes policy impact
Housing is crucial in household and bank balance sheets, with house price changes significantly affecting the real economy.
The paper notes that these effects are highly heterogeneous across countries, reflecting structural housing and mortgage market features.
For example, the substantial rise in real house prices during the Covid-19 pandemic contributed positively to consumption, while subsequent deceleration amid monetary policy tightening dampened it.
This cross-country heterogeneity, driven by factors like homeownership rates and adjustable-rate mortgages, has relevant policy implications.
Structural changes in these markets may have altered the strength of monetary policy transmission to consumption via housing.
Unlocking housing's policy puzzle
This study offers critical empirical evidence on how housing wealth impacts monetary policy, a complex and often debated area.
Its novel methodological approach provides a consistent framework for cross-country analysis, enhancing our understanding of diverse transmission channels.
For central banks, these findings underscore the necessity of considering structural housing market features when calibrating policy, particularly regarding consumption responses.