Higher rates have disproportionate effects on wealthy asset owners

Calvin He and Gianni La Cava, “The Distributional Effects of Monetary Policy: Evidence from Local Housing Markets,” Research Discussion Paper, Reserve Bank of Australia, February 2020, https://www.rba.gov.au/publications/rdp/2020/2020-02.html

***Note: cash rate is the Aussie equivalent of the federal funds rate***

5.2 Results

The estimated coefficients (Betag,h) of the restricted model are presented in Figure 4. Recall that this model estimates the differential effect of monetary policy between price deciles and the median group (the 5th decile). The results suggest that monetary policy has heterogeneous effects across the distribution of price levels. Specifically, following an increase in the cash rate, housing prices in more expensive housing markets (the upper deciles) fall more strongly than prices in cheaper markets (the lower deciles).

[[Figure 4 Omitted]]

The largest differences in response to monetary policy changes occur in the top half of the price distribution. We find that a 100 basis point increase in the cash rate is associated with housing prices falling by more in the expensive areas after about three quarters. The peak difference in housing price responses occurs six quarters following the change in monetary policy at about –1.4 per cent, on average. This implies, for example, that housing prices would fall by about 3.7 per cent in the top four price deciles if prices in the median area fall by 2.3 per cent in response to a 100 basis point increase in the cash rate. In the bottom half of the price distribution, local areas appear to be less sensitive to changes in the cash rate than the median area, though the evidence is less clear.