Effects of Flexibility in Housing Tenure Transitions on Monetary Policy Transmission Mechanisms Through Homeownership Decision Channels

This article examines the effects of homeownership decision channels on monetary policy transmission focusing on the flexibility in housing tenure transitions from mortgaged housing to rental housing after monetary policy shocks. Using Bayesian Panel VAR models, the study shows that the transmission of house price fluctuations to the macroeconomy is attenuated in the economies with higher volatility in housing tenure distribution. A New Keynesian model incorporated with homeownership decision channels is provided for theoretical explanations, showing that flexible transitions from mortgaged to rental housing after contractionary monetary policy shocks lead to more significant declines in housing prices but weaker declines in output by liquidity enhancement effects. This explains the attenuated impact of house price on the real economy estimated in the empirical results. The study also finds that rent rigidity has limited and temporary effects on homeownership decisions channels