This paper examines the differential effect of monetary policy shocks on different U.S. local housing markets. Conventional methods focus solely on aggregate housing prices, but neglect useful cross-sectional variation in local housing prices. By exploiting the heterogeneity in housing supply elasticity, I provide estimates of local housing price responses to monetary policy shocks in a large sample of metropolitan statistical areas. Given an expansionary shock that decreases the Federal Funds rate by 100 basis points, housing prices increase by 12% in cities with a highly inelastic housing supply (e.g., San Francisco), but by only 1.7% in cities with a very elastic housing supply (e.g., Iowa City) at the two-year horizon. To understand the monetary policy transmission mechanism in the housing market, I develop a structural model of the housing price with information friction. The model is identified by incorporating the variation in housing supply and estimated by targeting model-implied housing price impulse responses to their empirical counterparts. Structural estimates of the model suggest that households are well-informed about changes in local housing demand but have little idea about how changes in monetary policy affect the local housing market.
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|Published - Nov 2019