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Atlanta Marriott Marquis, International 8
American Economic Association
Mortgages and Monetary Policy Transmission
Saturday, Jan. 5, 2019 10:15 AM - 12:15 PM
- Chair: Miguel Faria-e-Castro, Federal Reserve Bank of St. Louis
Credit Cycles with Market Based Household Leverage
AbstractWe 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.
AbstractWe 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.
Federal Reserve Bank of St. Louis
- G2 - Financial Institutions and Services
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit