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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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File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2013/rap_wp275_140423_updated.pdf
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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. Matteo Iacoviello & Stefano Neri, 2010. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 2(2), pages 125-64, April.
  2. Hancock, Diana & Passmore, Wayne, 2011. "Did the Federal Reserve's MBS purchase program lower mortgage rates?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(5), pages 498-514.
  3. Musso, Alberto & Neri, Stefano & Stracca, Livio, 2010. "Housing, consumption and monetary policy: how different are the US and the euro area?," Working Paper Series, European Central Bank 1161, European Central Bank.
  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, Elsevier, vol. 35(12), pages 1999-2041.
  5. Meeks, Roland, 2012. "Do credit market shocks drive output fluctuations? Evidence from corporate spreads and defaults," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(4), pages 568-584.
  6. Diana Hancock & Wayne Passmore, 2011. "Did the Federal Reserve's MBS purchase program lower mortgage rates?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2011-01, Board of Governors of the Federal Reserve System (U.S.).
  7. L. Gambacorta & B. Hofmann & G. Peersman, 2011. "The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross-Country Analysis," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 11/765, Ghent University, Faculty of Economics and Business Administration.
  8. Simon Gilchrist & Vladimir Yankov & Egon Zakrajsek, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," NBER Working Papers 14863, National Bureau of Economic Research, Inc.
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  10. Francesco Furlanetto & Francesco Ravazzolo & Samad Sarferaz, 2014. "Identification of financial factors in economic fluctuations," Working Paper, Norges Bank 2014/09, Norges Bank.
  11. Meixing Dai & Frédéric Dufourt & Qiao Zhang, 2013. "Large Scale Asset Purchases with Segmented Mortgage and Corporate Loan Markets," AMSE Working Papers 1336, Aix-Marseille School of Economics, Marseille, France, revised Jun 2013.
  12. Kydland, Finn & Rupert, Peter & Sustek, Roman, 2012. "Housing Dynamics over the Business Cycle," University of California at Santa Barbara, Economics Working Paper Series qt7bn5k73m, Department of Economics, UC Santa Barbara.
  13. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers, Society for Economic Dynamics 1414, Society for Economic Dynamics.
  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, Federal Reserve Bank of Boston 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, C.E.P.R. Discussion Papers 8386, C.E.P.R. Discussion Papers.
  16. Fornari, Fabio & Stracca, Livio, 2013. "What does a financial shock do? First international evidence," Working Paper Series, European Central Bank 1522, European Central Bank.
  17. Teruyoshi Kobayashi, 2008. "Incomplete Interest Rate Pass-Through and Optimal Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 77-118, September.
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