Homeownership,informality and the transmission of monetary policy |
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Institution: | 1. Bogazici University, Department of Economics, Natuk Birkan Binasi Kat: 2 Bebek, 34342 Istanbul, Turkey;2. Tilburg University – European Banking Center, Department of Economics, Room K322B, 5000 LE Tilburg, The Netherlands;1. School of Business, University of Alberta, Canada;2. Department of Economics, Hitotsubashi University, Japan;1. Faculty of Economics and Business, University of Groningen, The Netherlands;2. Division of Economics, University of Stirling, United Kingdom |
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Abstract: | Cross-country aggregate data exhibits a strong (positive) relationship between the size of the informal employment and aggregate homeownership rates. We investigate this empirical observation using a cash-in-advance model with housing markets and argue that the rate of inflation is important in explaining the nexus between informality and homeownership rates. Specifically, we uncover a novel monetary transmission mechanism and show that households with informal employment desire to economize on their short-term cash usage and avoid periodic rental payments when (i) informality is associated with constrained business investment finance, and (ii) inflation expectations are high. Our empirical and theoretical findings highlight an important interaction between the conduct of monetary policy and the performance of housing markets. |
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Keywords: | Cash-in-advance Informality Cross-country data Monetary transmission |
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