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 show that this reflects a reallocation of housing demand across tenure types in segmented housing markets: a monetary tightening shifts credit-constrained households' demand from owning toward renting, and rents rise when rental supply cannot fully absorb the higher rental demand. I quantify this mechanism in an estimated general equilibrium model and show that both housing market segmentation and tenure substitutability are needed to reproduce the observed positive rent response. Because the resulting rent inflation is a relative-price adjustment rather than generalized excess demand, Taylor rules that respond to shelter-inclusive inflation can overreact and reduce welfare relative to rules that treat shelter differently. Excluding shelter from the target delivers a weak Pareto improvement, while responding separately to goods inflation and relative shelter prices can generate larger aggregate gains but redistribute welfare across agents.