Report

Regional heterogeneity and the refinancing channel of monetary policy


Abstract: We argue that the time-varying regional distribution of housing equity influences the aggregate consequences of monetary policy through its effects on mortgage refinancing. Using detailed loan-level data, we show that regional differences in housing equity affect refinancing and spending responses to interest rate cuts but that these effects vary over time with changes in the regional distribution of house price growth. We then build a heterogeneous household model of refinancing with both mortgage borrowers and lenders and use it to explore the aggregate implications for monetary policy arising from our regional evidence. We find that the 2008 equity distribution made spending in depressed regions less responsive to interest rate cuts, thus dampening aggregate stimulus and increasing regional consumption inequality, whereas the opposite occurred in some earlier recessions. Taken together, our results strongly suggest that monetary policy makers should track the regional distribution of equity over time.

Keywords: monetary policy; regional inequality; mortgage refinancing; quantitative easing;

JEL Classification: G21; E52; E21;

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Authors

    Hurst, Erik

    Vavra, Joseph

    Beraja, Martin

    Fuster, Andreas

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2016-11-01

Number: 731

Pages: 73 pages

Note: Former title: Regional heterogeneity and monetary policy