Essays on Monetary Policy, Housing, and Asset Choices

Abstract

This thesis comprises four chapters. Chapter 1 introduces the thesis and provides an overview of the three essays that examine monetary policy transmission through housing markets and asset choices.

To understand how monetary policy affects housing markets, we first examine the traditional transmission channels alongside a less-studied supply-side mechanism. Chapter 2 investigates the transmission of monetary policy to housing markets through interest rate and permit channels. Using national time series data and individual mortgage records, we find that a 100 basis point increase in the Federal Funds Rate leads to a 15-19 basis point rise in mortgage rates. Our local projections analysis shows that contractionary monetary policy leads to a total decline of approximately 4.5% in real housing prices after five years, with the direct effect accounting for 5% decline and the permit channel providing a modest countervailing force of 0.5%. The transmission exhibits significant heterogeneity across metropolitan areas and borrower characteristics.

While the first essay focuses on empirical evidence from housing markets, how does access to financial intermediation affect household portfolio choices and the distributional consequences of monetary policy? Chapter 3 studies how banking services as liquidity intermediation affect household portfolio choices and the distributional consequences of monetary policy in a heterogeneous agent model with unemployment risk. We extend established frameworks to include competitive banking services that facilitate liquidity exchange between households. Banking enables substantial portfolio rebalancing towards higher-return assets, with the aggregate money share of total wealth falling by 16.5 percentage points. However, this rebalancing is highly heterogeneous, with wealthy households substituting towards illiquid assets whilst low-asset households maintain higher money shares for employment insurance. Welfare gains are substantial but vary considerably across household types.

Beyond traditional price and interest rate effects, housing markets may be affected through changes in market liquidity that have received limited attention in the literature. Chapter 4 introduces housing market transaction time, measured by days on the market, as a channel for monetary policy transmission. Using high-frequency monetary policy shocks and comprehensive mortgage data, we find that a one-standard-deviation contractionary monetary policy increases days on market by over 2% within eight quarters. Importantly, cities experiencing greater increases in transaction times face steeper declines in house prices and larger increases in mortgage rates, revealing an amplification mechanism that exacerbates debt overhang problems during housing market downturns. Show more