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The Credit Supply Channel of Monetary Policy Tightening and its Distributional Impacts

Author

Listed:
  • Joshua Bosshardt
  • Marco Di Maggio
  • Ali Kakhbod
  • Amir Kermani

Abstract

This paper studies how tightening monetary policy transmits to the economy through the mortgage market and sheds new light on the distributional consequences at both individual and regional levels. We find that credit supply factors, specifically restrictions on the debt-to-income (DTI) ratio, account for most of the decline in mortgages. These effects are even more pronounced for minority and middle-income borrowers, who find themselves excluded from the credit market. Additionally, regions with historically high DTI ratios exhibit greater reductions in mortgage originations, house prices, and consumption.

Suggested Citation

  • Joshua Bosshardt & Marco Di Maggio & Ali Kakhbod & Amir Kermani, 2023. "The Credit Supply Channel of Monetary Policy Tightening and its Distributional Impacts," NBER Working Papers 31464, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31464
    Note: CF ME
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    References listed on IDEAS

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    1. William D. Larson, 2022. "Effects of Mortgage Interest Rates on House Price Appreciation: The Role of Payment Constraints," FHFA Staff Working Papers 22-04, Federal Housing Finance Agency.
    2. Michael Carlos Best & James S Cloyne & Ethan Ilzetzki & Henrik J Kleven, 2020. "Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(2), pages 656-690.
    3. DeFusco, Anthony A. & Nathanson, Charles G. & Zwick, Eric, 2022. "Speculative dynamics of prices and volume," Journal of Financial Economics, Elsevier, vol. 146(1), pages 205-229.
    4. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    5. Marco Di Maggio & Amir Kermani & Christopher J Palmer, 2020. "How Quantitative Easing Works: Evidence on the Refinancing Channel," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(3), pages 1498-1528.
    6. Marco Di Maggio & Amir Kermani & Benjamin J. Keys & Tomasz Piskorski & Rodney Ramcharan & Amit Seru & Vincent Yao, 2017. "Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging," American Economic Review, American Economic Association, vol. 107(11), pages 3550-3588, November.
    7. Bartlett, Robert & Morse, Adair & Stanton, Richard & Wallace, Nancy, 2022. "Consumer-lending discrimination in the FinTech Era," Journal of Financial Economics, Elsevier, vol. 143(1), pages 30-56.
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    Cited by:

    1. Bruno Albuquerque & Martin Iseringhausen & Frederic Opitz, 2024. "The Housing Supply Channel of Monetary Policy," IMF Working Papers 2024/023, International Monetary Fund.

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    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G5 - Financial Economics - - Household Finance
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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