Essays on monetary policy, credit and housing.

Margaris, Aristotelis and Pavlidis, Efthymios and Miescu, Mirela Sorina and Motta, Giorgio (2023) Essays on monetary policy, credit and housing. PhD thesis, Lancaster University.

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Abstract

The present thesis consists of two independent chapters. The contribution of the thesis lies in the field of monetary policy, particularly in the conjunction of monetary policy with credit and housing. The first chapter contributes to the literature by shedding light on the interaction of monetary policy with Government Sponsored Enterprises (GSEs) in the U.S. and revealing their crucial role in the transmission of monetary policy through financial intermediaries. The analysis suggests that GSEs expand their share in the mortgage market after a monetary policy tightening. We discuss three reasons behind this result and then focus on its implication on the transmission mechanism of monetary policy shocks. We conduct a counterfactual experiment to measure the effects of a monetary tightening on the economy when GSEs’ future market share is constrained not to respond to this shock. We document a sizable difference between the standard and the counterfactual impulse responses. Under the counterfactual, monetary policy is more effective in contracting real activity, prices and increasing credit cost. Thus GSEs’ share expansion after a monetary tightening erodes the effects of the latter on the economy. We link those findings with the bank-lending channel of monetary policy. We argue that GSEs mitigate the increase in the cost of financing for financial intermediaries after a monetary tightening. As the bank-lending channel predicts, a relatively lower cost of liquid funds implies a smaller increase in external finance premium and, therefore, a lower impact of a monetary tightening on the economy. The second chapter constitutes the first body of research to provide estimates of the dynamic effects of monetary policy on regional house prices in the U.K. and reveal heterogeneity in the responses of regional house prices to monetary policy shocks. The existing literature dedicates much attention to differences in local housing supply to interpret the heterogenous response of regional house prices to economic shocks. The chapter contributes to this debate by showing that heterogeneous regional house price developments after a monetary policy shock relate to borrowing constraints and the household balance sheet compositions in the region. To the best of our knowledge, this thesis is the first which adds this dimension to regional house price heterogeneity. After a monetary expansion, in regions with low loan-to-income ratios, households exploit lower mortgage rates and increase regional housing demand via intertemporal substitution. On the contrary, in regions with low housing affordability, a large share of households are constrained to borrowing and cannot increase housing demand. Consequently, house prices appreciate relatively less after a monetary policy expansion.