NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Regional Heterogeneity and Monetary Policy

Martin Beraja, Andreas Fuster, Erik Hurst, Joseph Vavra

NBER Working Paper No. 23270
Issued in March 2017, Revised in August 2017
NBER Program(s):   EFG   ME   PE

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 and unemployment. We then build a heterogeneous household model of refinancing 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.

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Document Object Identifier (DOI): 10.3386/w23270

 
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