Working Paper

Effects of Monetary Policy on Household Expectations: The Role of Homeownership

Abstract: We study the role of homeownership in the effectiveness of monetary policy on households' expectations. Empirically, we find that homeowners revise down their near-term inflation expectations and their optimism about future labor market conditions in response to a rise in mortgage rates, while renters are less likely to do so. We further show that the monetary-policy component of mortgage-rate changes creates the difference in expectation revisions between homeowners and renters. This result suggests that homeowners are attentive to news on interest rates and adjust their expectations accordingly in a manner consistent with the intended effect of monetary policy. We characterize these findings using a rational inattention model with two types of households---homeowners and renters.

Keywords: Inflation expectations; Homeownership; Rational inattention;

JEL Classification: D83; D84; E31; E52;

https://doi.org/10.17016/FEDS.2022.065

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2022-10-03

Number: 2022-065

Pages: 50 p.