Abstract

We quantify the importance of heterogeneity for monetary policy using a new heterogeneous-agent VAR (HAVAR) model that integrates national monetary/financial markets with regional housing markets via the mortgage rate. Although the HAVAR model has linear regional VARs, its aggregate impulse responses exhibit two nonlinearities: (1) time variation, stemming from aggregation over heterogeneous regions, and (2) state dependence on initial economic conditions in regions. Thus, monetary policy has “long and variable lags” because monetary transmission depends on the extent and nature of regional heterogeneity, which both vary over time. The model is estimated with data for U.S. regions from 1986 to 1996 and simulated to show how coastal housing booms might influence the efficacy of monetary policy.

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Additional Information

ISSN
1538-4616
Print ISSN
0022-2879
Pages
pp. 557-589
Launched on MUSE
2003-07-17
Open Access
No
Archive Status
Archived 2007
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