European Central Bank working paper links housing wealth multiplier to outright homeownership and finds cash-flow channel drives cross-country transmission differences

The European Central Bank published a working paper by Paola Di Casola and Magdalena Grothe examining how housing wealth and mortgage market structures shape the transmission of monetary policy to consumption across 20 advanced economies. The paper finds substantial cross-country differences in how consumption and house prices respond to monetary policy shocks, and concludes that once housing wealth effects are controlled for, heterogeneity in consumption responses is largely driven by the cash-flow channel. Using country-specific structural Bayesian vector autoregression models on quarterly data from 1995Q1 to 2023Q4, the analysis identifies monetary policy, housing demand, mortgage supply and aggregate demand and supply shocks with a combined approach using sign restrictions and maximum forecast error variance restrictions. It introduces a “housing wealth multiplier”, defined from housing demand shocks as the ratio between peak cumulative consumption and house price responses, and finds it is strongly correlated with outright homeownership rates and is higher for durable consumption. The strength of monetary policy effects on consumption and house prices is related to housing and mortgage market characteristics including homeownership shares, household debt over GDP and the share of adjustable-rate mortgages, while counterfactual impulse responses holding house prices fixed indicate that cash-flow effects remain central to explaining cross-country transmission differences.