Navigating the Housing Channel of Monetary Policy Across Euro Area Regions

Abstract

This paper assesses the role of the housing market in the transmission of monetary policy across euro area regions. By exploiting a novel regional dataset on housing-related variables, a structural panel VAR analysis shows that conventional and unconventional monetary policy shocks propagate effectively to the economy, particularly to the housing sector, albeit in a heterogeneous fashion across regions. A formal econometric analysis relates this heterogeneous impact of monetary policy to housing-related long-run regional economic and institutional characteristics. The analysis indicates a prominent role for the housing channel in the transmission of monetary policy to the economy, via both housing wealth and balance sheet effects. Moreover, heterogeneity in institutional features (share of fixed-rate mortgages) and labour income help explain the transmission of monetary policy across regions.