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Mortgages and Monetary Policy Transmission

Paper Session

Saturday, Jan. 5, 2019 10:15 AM - 12:15 PM

Atlanta Marriott Marquis, International 8
Hosted By: American Economic Association
  • Chair: Miguel Faria-e-Castro, Federal Reserve Bank of St. Louis

Monetary Policy, Heterogeneity, and the Housing Channel

Aaron Hedlund
,
University of Missouri-Columbia
Fatih Karahan
,
Federal Reserve Bank of New York
Kurt Mitman
,
Stockholm University
Serdar Ozkan
,
University of Toronto

Abstract

We investigate the role of housing and mortgage debt in the transmission of monetary policy to household consumption and the aggregate economy. In order to do so, we develop a heterogenous agents model with a frictional housing market, nominal long-term borrowing, default, and price rigidities. The model is able to capture rich heterogeneity in home ownership and leverage. Endogenous cyclical movements in house prices as well as counter-cyclical dynamics in the liquidity of housing allows us to explore the various indirect mechanisms through which monetary policy affects consumption. Nominal long-term mortgage debt implies that changes in monetary policy will result in redistribution between lenders and borrowers. Further, a contractionary monetary policy shock raises the cost of borrowing which reduces liquidity in the housing market, depresses house prices and feeds back into increasing the cost of borrowing. We find that this amplification channel disproportionally affects households with high leverage and high marginal propensities to consume. Finally, we investigate how booms and busts in the housing market asymmetrically affect the efficacy of monetary policy.

Credit Cycles with Market Based Household Leverage

Tim Landvoigt
,
University of Pennsylvania
William Diamond
,
University of Pennsylvania

Abstract

We develop a model in which the net worth of the financial sector endogenously determines the severity of household credit constraints. We use the model to quantify the effect of several fundamental shocks on housing prices and mortgage debt. Negative shocks to intermediary capital endogenously tighten credit constraints for borrowers, leading constrained households to reduce their consumption and leverage. Relative to a model with exogenous credit constraints, the macroeconomic importance of intermediary net worth is magnified through its equilibrium effects on the supply of high-leverage loans. We use our model to (i) compare recessions driven by only by low productivity to those featuring a mortgage crisis, (ii) analyze the real economic spillovers of a loss to intermediary capital, and (iii) show how a growing demand for safe assets leads to many features of the housing boom of the 2000s and increases the vulnerability of the economy to financial crises.

Quantitative Tightening

Vadim Elenev
,
Johns Hopkins University
Miguel Faria-e-Castro
,
Federal Reserve Bank of St. Louis
Daniel Greenwald
,
Massachusetts Institute of Technology

Abstract

We investigate how the timing with which a central bank unwinds its portfolio after asset purchases affects the dynamics of the recovering economy and the ability of the central bank to stabilize future crises. Although delayed unwinding can support house prices and borrower consumption during the recovery, it can lead to severe consequences in a future crisis if the central bank faces constraints on the size of its portfolio, doubling the drops in house prices and borrower consumption. Early unwinding provides additional room for QE, further dampening the impact of a crisis, with relatively mild short-run costs as long as conventional monetary policy is able to offset the impact of unwinding on demand. Overall, our results point to precautionary benefits of unwinding soon after the economy exits the zero lower bound.
Discussant(s)
Arlene Wong
,
Princeton University
Carlos Garriga
,
Federal Reserve Bank of St. Louis
Pedro Gete
,
IE University
JEL Classifications
  • G2 - Financial Institutions and Services
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit