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Business Cycle Implications of Mortgage Spreads

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  • Walentin, Karl

    ()
    (Research Department, Central Bank of Sweden)

Abstract

How do aggregate quantities at the business cycle frequency respond to shocks to the spread between residential mortgage rates and government bonds? Using a structural VAR approach, we find that mortgage spread shocks impact the real economy by both economically and statistically significant magnitudes: a 100 basis point decline in the spread causes a peak increase in consumption, residential investment and GDP by 1.6 percent, 6.2 percent and 1.9 percent, respectively. These effects are magnified when the policy rate is held fixed, as was the case in the US during the recent implementation of unconventional monetary policy.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 275.

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Length: 36 pages
Date of creation: 01 Sep 2013
Date of revision: 01 Mar 2014
Handle: RePEc:hhs:rbnkwp:0275

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
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Keywords: Sources of business cycles; unconventional monetary policy; credit supply; house prices; financial frictions;

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  1. Fornari, Fabio & Stracca, Livio, 2013. "What does a financial shock do? First international evidence," Working Paper Series 1522, European Central Bank.
  2. Musso, Alberto & Neri, Stefano & Stracca, Livio, 2010. "Housing, consumption and monetary policy: how different are the US and the euro area?," Working Paper Series 1161, European Central Bank.
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  12. Meixing Dai & Frédéric Dufourt & Qiao Zhang, 2013. "Large Scale Asset Purchases with Segmented Mortgage and Corporate Loan Markets," Working Papers halshs-00842279, HAL.
  13. Diana Hancock & Wayne Passmore, 2011. "Did the Federal Reserve's MBS purchase program lower mortgage rates?," Finance and Economics Discussion Series 2011-01, Board of Governors of the Federal Reserve System (U.S.).
  14. Meeks, Roland, 2012. "Do credit market shocks drive output fluctuations? Evidence from corporate spreads and defaults," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 568-584.
  15. Muellbauer, John & Williams, David M, 2011. "Credit Conditions and the Real Economy: The Elephant in the Room," CEPR Discussion Papers 8386, C.E.P.R. Discussion Papers.
  16. Teruyoshi Kobayashi, 2008. "Incomplete Interest Rate Pass-Through and Optimal Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 77-118, September.
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