This paper studies the effects of monetary policy on housing rents. We provide comprehensive measures of rent inflation at a micro-geographic scale by constructing a new repeat-rent index. Using our rent index, we estimate the impulse responses of rents to monetary policy shocks. We find that, on average, monetary tightening increases rents. The effect is driven by a shift in demand from the owner-occupied market to the rental market. Areas where household borrowing constraints are more binding, where renter and owner markets are more segmented, and where landlords are more levered experience greater rent increases following the same contractionary shock.

Media: Columbia

Contractionary monetary policy can raise housing rents even as house prices fall and goods inflation declines. I argue that this response reflects tenure reallocation in segmented housing markets: tighter credit shifts constrained households from ownership toward renting. Whether rents rise or fall depends on the substitutability between owning and renting, which governs the strength of this demand shift, and on housing market segmentation, which limits landlords' ability to expand rental supply. I first develop this mechanism in a simple model and then embed it in an estimated dynamic stochastic general equilibrium (DSGE) model with heterogeneous households, collateral constraints, and costly reallocation of housing between the owner- and renter-occupied sectors. The estimates imply substantial housing market segmentation, reproduce the empirically observed positive rent response to monetary tightening, and generate rental-supply elasticities consistent with external evidence. Because the resulting rent inflation reflects a relative-price adjustment rather than generalized excess demand, Taylor rules that target shelter-inclusive inflation overreact and reduce welfare. Rules that exclude shelter deliver a weak Pareto improvement, while rules that respond separately to goods inflation and relative shelter prices generate larger aggregate gains but redistribute welfare across agents.