Housing, the Credit Market and Unconventional Monetary Policies: From the Sovereign Crisis to the Great Lockdown

This paper develops a two-country model of a monetary union to evaluate the interaction between housing and unconventional monetary policies. The model is calibrated for the Euro Area and assesses the ECB’s Asset Purchase Programmes (APP) from 2015 until the Pandemic Emergency Purchase Programme (PEPP) in 2020. The model incorporates heterogeneous households, portfolio balance effects, a credit market susceptible to default, and nominal and real rigidities. In this paper the 2020 lockdown is studied as a negative signal from macroeconomic fundamentals which causes labor to grind to a halt. The model features the housing accelerator and the post-crisis house price double-dip. The findings illustrate the way in which macro-housing channels lead to self-reinforcing loops, affecting the portfolio rebalancing channel as the main way for asset purchases to influence the economy. The results show that asset purchasing performs better during a crisis, particularly if it is conducted for an appropriate extent of time. The findings illustrate that the PEPP should be extended until the covid-19 crisis phase is over and that it alone is not sufficient to accelerate the recovery; more actions, namely targeted fiscal policy, are required. Finally, the APP, PEPP and lockdown are assessed through a welfare analysis.