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Business Cycle Implications of Mortgage Spreads

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Author Info

  • Walentin, Karl

    ()
    (Monetary Policy Department, Central Bank of Sweden)

Abstract

What are the business cycle effects of shocks to the interest rate spread between residential mortgages and government bonds of the corresponding maturity? We start by noting that the mortgage spread (i) has substantial volatility,(ii) is countercyclical and (iii) leads GDP by 2-3 quarters. Using a structural VAR, we find that innovations to the mortgage spread reduce house prices, residential investment, consumption and GDP by both economically and statistically significant magnitudes. Furthermore, the policy interest rate reacts strongly and in an offsetting direction to mortgage spread innovations. These findings highlight the relevance of financial frictions in residential mortgage markets as an unexplored source of business cycles. In addition, we show that unconventional monetary policy which affects the mortgage spread has sizable macroeconomic impact. Our results are robust to the inclusion of a corporate spread

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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: 43 pages
Date of creation: 01 Sep 2013
Date of revision:
Handle: RePEc:hhs:rbnkwp:0275

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Related research

Keywords: Sources of business cycles; unconventional monetary policy; credit supply; housing demand; house prices; financial frictions;

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  1. 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.
  2. Meixing Dai & Frédéric Dufourt & Qiao Zhang, 2013. "Large Scale Asset Purchases with Segmented Mortgage and Corporate Loan Markets," Working Papers halshs-00842279, HAL.
  3. Gilchrist, Simon & Yankov, Vladimir & Zakrajsek, Egon, 2009. "Credit market shocks and economic fluctuations: Evidence from corporate bond and stock markets," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 471-493, May.
  4. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2011. "Introducing financial frictions and unemployment into a small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 1999-2041.
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  6. Finn E. Kydland & Peter Rupert & Roman Sustek, 2012. "Housing Dynamics over the Business Cycle," NBER Working Papers 18432, National Bureau of Economic Research, Inc.
  7. Helbling, Thomas & Huidrom, Raju & Kose, M. Ayhan & Otrok, Christopher, 2011. "Do credit shocks matter? A global perspective," European Economic Review, Elsevier, vol. 55(3), pages 340-353, April.
  8. Hancock, Diana & Passmore, Wayne, 2011. "Did the Federal Reserve's MBS purchase program lower mortgage rates?," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 498-514.
  9. Matteo Iacoviello & Stefano Neri, 2007. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," Boston College Working Papers in Economics 659, Boston College Department of Economics, revised 23 Oct 2009.
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  11. 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.
  12. Roman Sustek & Peter Rupert & Finn Kydland, 2012. "Housing Dynamics," 2012 Meeting Papers 315, Society for Economic Dynamics.
  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. Andreas Fuster & Paul S. Willen, 2010. "$1.25 Trillion is still real money : some facts about the effects of the Federal Reserve’s mortgage market investments," Public Policy Discussion Paper 10-4, Federal Reserve Bank of Boston.
  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. Fabio Fornari & Livio Stracca, 2012. "What does a financial shock do? First international evidence," Economic Policy, CEPR & CES & MSH, vol. 27(71), pages 407-445, 07.
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