Staff Reports
Regional Heterogeneity and the Refinancing Channel of Monetary Policy
Previous title: "Regional Heterogeneity and Monetary Policy"
June 2015 Number 731
Revised March 2018
JEL classification: E21, E52, G21

Authors: Martin Beraja, Andreas Fuster, Erik Hurst, and Joseph Vavra

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. We then build a heterogeneous household model of refinancing with both mortgage borrowers and lenders 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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