infonet-economy

This paper examines why monetary policy can have vastl< different effects on local housing prices across metropolitan statistical areas (MSAs). We focus on the period 1995 to 2008, which includes the period of housing price bubbles in several parts of the U.S. Based on a spatial panel approach we show that MSAs with similar demand conditions, as measured for example by population growth, and similar supply conditions, as measured for example by housing supply elasticities, react similarly to monetary policy at the national level. In a follow-up panel data model we confirm the importance of these MSA-specific characteristics directly through a set of interaction terms between these factors and monetary policy stance and sentiment indicators. It turns out that MSA-specific demand and supply characterisitcs, such as population growth and inelastic housing supply , are the crucial links that transmit national monetary policy and sentiment into housing price inflation at the local level.