Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises
AbstractThis paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8624.
Date of creation: Oct 2011
Date of revision:
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Other versions of this item:
- Karsten Jeske & Dirk Krueger & Kurt Mitman, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," PIER Working Paper Archive 11-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Karsten Jeske & Dirk Krueger & Kurt Mitman, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," NBER Working Papers 17537, National Bureau of Economic Research, Inc.
- Dirk Krueger, 2012. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," 2012 Meeting Papers 102, Society for Economic Dynamics.
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-01 (All new papers)
- NEP-DGE-2011-11-01 (Dynamic General Equilibrium)
- NEP-MAC-2011-11-01 (Macroeconomics)
- NEP-URE-2011-11-01 (Urban & Real Estate Economics)
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