This paper shows that monetary policy has uneven impacts on local housing markets, and that the magnitude of the impacts are correlated with housing supply regulations. We apply the linearized present value model, which allows the log rent–price ratio to be decomposed into the expected present values of all future real interests rates, real housing premia, and real rent growth, to the housing markets in 23 US metropolitan statistical areas. Based on the indirect inference bias-corrected VAR estimates, we find that MSAs that are more regulated have (i) a higher variance in the log rent–price ratio, (ii) a larger share of the variance explained by real interest rate, and (iii) a stronger impulse response of house price to the real interest rate shock.
Present value model Rent–price ratio Housing supply regulations
E31 G12 R31
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We would like to thank editor Robert Kunst and two anonymous referees for their suggestions. We also thank Charles Leung and Jun Ma for useful comments.
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