Abstract
This paper studies the channels by which monetary policy shocks affect local housing prices. It first documents there is a sluggish response of housing prices, suggesting that informational frictions may be potentially important. It then develops a structural model of housing prices with information frictions, and exploits variations in housing prices across metropolitan statistical areas to estimate it. The important finding is that although households are well-informed about local demand, they are ill-informed about how monetary policy affects the local housing market. A counterfactual experiment using the estimated model implies that deviations from the Taylor rule in the early 2000s contributed to about two-fifths of the subsequent housing boom.
Authors
- Shihan Xie
JEL codes
- D83
- E52
- R21
- R31