DP14968 One Money, Many Markets: Monetary Transmission and Housing Financing in the Euro Area

Author(s): Giancarlo Corsetti, Joao Duarte, Samuel Mann
Publication Date: June 2020
Keyword(s): Adjustable Mortgage Rates, High-Frequency Identification, housing market, Loan-to-value Ratio, monetary policy, monetary union
JEL(s): E21, E31, E44, E52, F44, F45
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14968

We study the transmission of monetary shocks across euro-area countries using a dynamic factor model and high-frequency identification. We develop a methodology to assess the degree of heterogeneity. We find this to be low in financial variables and output, but significant in consumption, consumer prices, and variables related to local housing and labor markets. We build a small open economy model featuring a housing sector and calibrate it to Spain. We show that varying the share of adjustable-rate mortgages and loan-to-value ratios explains up to one-third of the cross-country heterogeneity in the response of output and private consumption.