The effects of monetary policy through housing and mortgage choices on aggregate demand

Housing and mortgage choices are among the largest financial decisions households make and they substantially impact households' liquidity. This paper explores how monetary policy affects aggregate demand by influencing these portfolio choices. To quantify this channel, I build a heterogeneous‐agent life‐cycle model with long‐term mortgages and endogenous house prices. I find that, although only a small fraction of households adjust their housing and mortgage holdings in response to an expansionary monetary policy shock, these households account for over 50% of the increase in aggregate demand. Mortgage refinancing explains approximately four‐fifths of the contribution, whereas adjusted housing choices account for one‐fifth—uncovering a new transmission channel. I also show that the different pass‐through of the policy rate to short and long mortgage rates drives the difference in the house‐price and aggregate demand response between economies with adjustable‐rate as compared to fixed‐rate mortgages.