Risky Mortgages in a DSGE Model
This paper develops a DSGE model with housing, risky mortgages, and endogenous default. Housing investment is subject to idiosyncratic risk, and some mortgages are defaulted in equilibrium. An unanticipated increase in the standard deviation of housing investment risk produces a credit crunch where delinquencies and mortgage interest rates increase, lending is curtailed, and aggregate demand for non-durable goods falls. The economy experiences a recession as a consequence of the credit crunch. The paper compares economies that differ only in the riskiness of housing investment. Economies with lower risk are characterized by lower steady-state mortgage default rates and higher loan-to-value and leverage ratios. The macroeconomic effects of an unanticipated increase in housing investment risk are amplified in high-leverage economies. Monetary policy plays an important role in the transmission of housing investment risk, as inertial interest rate rules generate deeper output contractions.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Aoki, Kosuke & Proudman, James & Vlieghe, Gertjan, 2004.
"House prices, consumption, and monetary policy: a financial accelerator approach,"
Journal of Financial Intermediation,
Elsevier, vol. 13(4), pages 414-435, October.
- Kosuke Aoki & James Proudman & Gertjan Vlieghe, 2002. "House prices, consumption, and monetary policy: a financial accelerator approach," Bank of England working papers 169, Bank of England.
- Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003 7, Royal Economic Society.
- Matteo Iacoviello, 2002.
"House prices, borrowing constraints and monetary policy in the business cycle,"
Boston College Working Papers in Economics
542, Boston College Department of Economics, revised 06 Dec 2004.
- Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
- Bernanke, B. & Gertler, M. & Gilchrist, S., 1998.
"The Financial Accelerator in a Quantitative Business Cycle Framework,"
98-03, C.V. Starr Center for Applied Economics, New York University.
- Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
- Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
- Calza, Alessandro & Stracca, Livio & Monacelli, Tommaso, 2009.
"Housing finance and monetary policy,"
Working Paper Series
1069, European Central Bank.
- Carlstrom, Charles T & Fuerst, Timothy S, 1997.
"Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis,"
American Economic Review,
American Economic Association, vol. 87(5), pages 893-910, December.
- Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
- Ryo Kato, 2002. "Matlab code for the Carlstrom-Fuerst AER (1997) model," QM&RBC Codes 112, Quantitative Macroeconomics & Real Business Cycles.
- Tommaso Monacelli & Ester Faia, 2005.
"Optimal Interest Rate Rules, Asset Prices and Credit Frictions,"
Computing in Economics and Finance 2005
452, Society for Computational Economics.
- Faia, Ester & Monacelli, Tommaso, 2007. "Optimal interest rate rules, asset prices, and credit frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3228-3254, October.
When requesting a correction, please mention this item's handle: RePEc:ijc:ijcjou:y:2011:q:1:a:13. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Timo Laurmaa)
If references are entirely missing, you can add them using this form.