Nonlinear Transmission of Monetary Policy and Housing Market Imbalances: Evidence From a Factor‐Augmented Threshold VAR Analysis

ABSTRACT In recent decades, persistently low rates have driven housing booms and prompted questions on how market imbalances interact with monetary policy. In this paper, I investigate how such imbalances affect the monetary transmission in the United States. I create a boom‐bust cycle indicator from the rent‐price ratio and credit‐to‐GDP gap, then embed it in a factor‐augmented threshold VAR with two regimes to isolate the two parts of the cycle. Impulse responses show that monetary policy itself behaves differently conditional on the state of the housing market. Interest rates are eased much more gradually around booms, which suggests that broader macro‐financial signals are incorporated into the policy framework in order to effectively manage deleveraging in the market. The transmission channel appears to be less affected, as real and financial aggregates show only somewhat larger contractions in response to a monetary policy shock in a booming market.