Working Paper n.850 - Febbraio 2021
Giacomo Rella
DEPS, USiena
Abstract
Did the transmission mechanism of monetary policy through housing and household debt change over time? I explore this question using a ten-variable time-varying parameter VAR model with stochastic volatility estimated on US data from 1960 to 2018. The model captures the joint dynamics of aggregate economy, housing sector, policy and household debt. Monetary policy shocks are identified with timing restrictions. I find evidence that the transmission mechanism of monetary policy through housing and household debt changed over time. The response of new housing starts and residential investment to monetary policy shocks has become slower and slightly larger. In contrast, the sensitivity of household debt to monetary policy shocks diminished since the late 1960s, except of the early 2000s when it increased. House prices stand as the most important variable for the transmission of monetary policy through housing in most recent decades. In the last part of the paper, I frame the aggregate evidence in the light of the institutional changes that have been affecting the US housing finance system since the 1970s.
Keywords
time-varying parameter VAR, monetary policy, housing, household debt
Jel codes
E44, E52, E58, G51, N1
