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Housing market heterogeneity in a monetary union

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Issue Date
2009
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45 p.
Abstract
This paper studies the implications of cross-country housing market heterogeneity for a monetary union, also comparing the results with a flexible exchange rate and independent monetary policy setting. I develop a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore this issue. Results show that in a monetary union, consumption reacts more strongly to monetary policy shocks in countries with high loan-to-value ratios (LTVs), a high proportion of borrowers or variable-rate mortgages. As for asymmetric technology shocks, output and house prices increase by more in the country receiving the shock if it can conduct monetary policy independently. I also find that after country-specific housing price shocks consumption does not only increase in the country where the shock takes place, there is an international transmission. From a normative perspective, I conclude that housing-market homogenization in a monetary union is not beneficial per se, only when it is towards low LTVs or predominantly fixed-rate mortgages. Furthermore, I show that when there are asymmetric shocks but identical housing markets, it is beneficial to form a monetary union with respect to having a flexible exchange rate regime. However, for the examples I consider, net benefits decrease substantially if there is LTV heterogeneity and are negative under different mortgage contracts
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Documentos de trabajo / Banco de España, 0916
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