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House price, mortgage premium, and business fluctuations

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  • Chen, Nan-Kuang
  • Cheng, Han-Liang
  • Mao, Ching-Sheng

Abstract

This paper investigates the transmission mechanism of mortgage premium to characterize the relationship between the housing market and business cycle for the U.S. We find that mortgage premium is crucial for the amplification and propagation of the model to match the main properties of U.S. housing market and business cycles. The counterfactual analysis suggests that had the Federal Reserve raised the interest rate in 2003Q1, it would have curbed the housing market boom before the crisis, yet failed to alleviate the precipitous decline in housing market activity after the crisis. Moreover, the pre-emptive monetary policy aimed to contain the housing market boom can effectively lower volatilities of major economic aggregates; however, it also exerts a significantly negative effect on the levels of these economic aggregates. Thus, using monetary policy to stabilize asset price inflation involves a trade-off between the volatility and the level of economic activity.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 4 ()
Pages: 1388-1398

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:4:p:1388-1398

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Mortgage premium; House price; DSGE;

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Cited by:
  1. Cheng, Lichao & Jin, Yi, 2013. "Asset prices, monetary policy, and aggregate fluctuations: An empirical investigation," Economics Letters, Elsevier, vol. 119(1), pages 24-27.
  2. Leung, Charles Ka Yui, 2014. "Error correction dynamics of house prices: an equilibrium benchmark," Globalization and Monetary Policy Institute Working Paper 177, Federal Reserve Bank of Dallas.

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