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This paper studies the implications of cross-country housing market heterogeneity for a monetary union, also comparing the results with a flexible exchange rate and independent monetary policy setting. The author develops a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore this issue. Results show that in a monetary union, consumption reacts more strongly to monetary policy shocks in countries with high Loan-To-Value ratios (LTVs), a high proportion of borrowers or variable-rate mortgages. As for asymmetric technology shocks, output and house prices increase by more in the country receiving the shock if it can conduct monetary policy independently.
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