Monetary Policy

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

Future Policy and Information Dissemination: A Natural Language Processing Approach

Which words matter the most in central bank communication? Making use of a rather unique European monetary policy decision setting, we build the first monetary policy dictionary. We train the dictionary on high frequency movements of the stock market around press conferences of the European Central Bank. This allows us to precisely identify which phrases do the market mainly reacts to. We find that phrases such as "Improved economy", "Market development", and "Stability of the euro" are associated with positive returns. On the other hand, phrases such as "Heightened uncertainties" and "Growth of loans" are associated with negative returns.

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.