Group Local Projections

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Below I plot group-level impulse responses of US MSA-level housing prices to tightening monetary shocks.

The GLP recovers three distinct responses:

• considerable housing appreciation (Group 1)
  • Group 1 is more economically developed: with only 6.3% of the MSAs, this group accounts for 13.1% of the total personal income in the sample
  • it also has more regulated housing markets, less elastic house supply, and more indebted households
  • overall, this group seems to fit the “housing bubbles” narrative
• muted responses (Group 2)
• significant depreciation (Group 3)
  • although with completely different responses, Group 3 is also inhabited by heavily indebted households
  • so if we use pre-defined criteria, like debt-to-income ratio, we will mix the responses in Group 1 and 3