Summary
The housing market structure shows remarkable cross-country differences. In particular, these divergences are especially important in terms of the relative weight, the efficiency, and dynamics in the rental sector. The proportion of households that rents ranges between less than 10% in some Eastern European countries, until more than 50% in Switzerland, Japan or Germany. Within the European Union, we need to mention Germany and Spain, because of its highest and lowest rental ratio, respectively. This heterogeneity, which is due to several factors-cultural preferences, taxation, development of the rental market, demographics and institutional efficiency, among others-, can have a significant effect in the transmission of different economic shocks and in the conduct of monetary policy.
In this Nottingham School of Economics working paper, Margarita Rubio studies how housing tenure (rented vs. owner-occupied) affects monetary policy. In order to do that, she proposes a dynamic stochastic general equilibrium model with housing, both owned and rented. First, she analyze how, in the model, preference parameters, fiscal incentives and institutional factors determine the rental market share and the residential debt-to-GDP ratio. Then, within this framework, she studies how the transmission and optimality of monetary policy differ depending on these factors. From a positive perspective, impulse responses illustrate differences in the monetary transmission mechanism. In normative terms, results show that when the relative size of the rental market is larger, monetary policy is more stabilizing. An optimal monetary policy analysis also suggests that in this case, monetary policy should respond more aggressively to inflation and disregard output, since the …financial accelerator effects are weaker.
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CFCM Discussion Paper 14/09, Rented vs. Owner-Occupied Housing and Monetary Policy by Margarita Rubio, August 2014
Authors
Margarita Rubio
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Posted on Friday 1st August 2014