Housing Markets

Housing Markets and the Heterogeneous Effects of Monetary Policy Across the Euro Area

_Finalist at the 2022 ECB Young Economist Prize_ **Presented at**: Boston University, Collegio Carlo Alberto, Universidad Carlos III de Madrid, IE University, Federal Reserve Board, European Central Bank, Central Bank of Italy, Central Bank of Denmark, Central Bank of the Netherlands, Central Bank of Lithuania, 2021 European Winter Meeting of the Econometric Society, BU-BC Green Line Macro Meeting, Theories and Methods in Macroeconomics, Philadelphia FED Mortgage Market Research Conference

Household Beliefs Across Euro Area Countries During Covid-19

How do households across euro area countries plan their spending during the covid-19 pandemic? Making use of the Consumer Expectation Survey administered by the European Central Bank, we find that current balance sheets positions, as well as expectations about individual and aggregate variables, play an important role in household planned expenditures in durables. Expectations about both house price growth and inflation shape such plans, and these impacts have been changing during the course of the pandemic. An increase in the number of covid-related deaths in the region where households reside sharply decreases their planned expenditures over the following 12 months. Additionally, we uncover significant heterogeneity across education levels, age, and housing tenure.

A New Keynesian Model with a Rigid Housing Market

House price changes are strongly correlated in the data following monetary policy shocks. I build a New Keynesian model of the housing market where households choose the optimal amount of housing and mortgages. To accommodate realistic house price movements, I extend the housing market structure to include search frictions and house price rigidity so that the housing market clears through the relative fraction of successful buyers and sellers each period. I show that the house price momentum does not translate into slow movements of output and therefore it cannot explain the high degree of persistence found in the data following a contractionary monetary shock. I also highlight important redistributional effects between savers and borrowers in the economy. In particular, house price momentum coupled with the loan-to-value constraint forces the indebted households to cut their consumption for several quarters following a contractionary monetary shock.