Real Effects of the ECB's Quantitative Easing: A Housing Portfolio Channel
38 Pages Posted: 19 Mar 2021
Date Written: February 9, 2021
We propose a new channel of transmission through which central bank quantitative easing (QE) can affect local economic activity. In our model, in response to a QE intervention, a national financial intermediary responds by rebalancing its portfolio from bonds to housing. As a result, house prices increase, and the total portfolio return declines, boosting the economy by stimulating current consumption; the shorter the local housing supply, the stronger the consumption effects. We then investigate this channel empirically by employing German region-level data. Identification exploits the exogenous variation in land supply scarcity across regions to construct a measure of exposure to this housing channel. In line with the transmission in the model, we find that the QE impact on GDP growth is more potent in regions with tighter land supply. We estimate that a one-standard-deviation increase in the size of the ECB’s balance sheet raises GDP growth in the most exposed areas by 10-20 basis points more per year than in the least exposed ones. The differential response of residential property prices and rents to QE can account for this regional growth differential. The significance of the QE impact on growth disappears once we control for the government bond term spread, but survives when we condition on mortgage credit.
Keywords: Unconventional Monetary Policy, Housing Portfolio Channel, EONIA, Quantitative Easing, Regional Business Cycles, Germany, Real Estate
JEL Classification: E3, E4, E5, R3
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