Infrequent Housing Adjustment, Limited Participation, and Monetary Policy



  • I thank my dissertation advisors, Graham Elliott and Valerie Ramey, as well as Marjorie Flavin for their invaluable guidance throughout the writing of this paper. This paper has also benefited from comments from the editor (Pok-sang Lam), two anonymous referees, Sanjay Chugh, Geng Li, Lindsay Oldenski, Garey Ramey, Ricardo Reis, Giacomo Rondina, Sam Schulhofer-Wohl, Irina Telyukova, Rossen Valkanov, and workshop participants at Baruch College, Brandeis University, the Federal Reserve Banks of San Francisco and St. Louis, Rutgers University, UC Davis, UC Santa Cruz, UC San Diego, the University of Notre Dame, the University of Virginia, the Western Economics Association International Meetings, and the Asian Real Estate Society Annual Meetings. An earlier draft of this paper circulated under the title “Sticky Housing and the Real Effects of Monetary Policy”.

Andra Ghent is at the Department of Finance, Arizona State University, W.P. Carey School of Business (E-mail:


This paper asks why monetary contractions have strong effects on the housing market. The paper presents a model with staggered housing adjustment in which monetary policy has real effects in the absence of any rigidity in producer pricing or wages. Limited participation in financial markets leads to a rise in the real mortgage rate following an increase in the nominal short rate. Since households must take on a mortgage to consume housing, the rise in the real interest rate reduces the share of residential investment in output.