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House Price, Mortgage Premium, and Business Fluctuations

  • Nan-Kuang Chen

    (National Taiwan University and Hong Kong Institute for Monetary Research)

  • Han-Liang Cheng

    (Chung-Hua Institution for Economic Research)

  • Ching-Sheng Mao

    (National Taiwan University)

This paper investigates the transmission mechanism of mortgage premium to characterize the relationship between the housing market and the business cycle for the U.S. economy. The model matches the main features of the U.S. housing market and business cycles well. The mortgage premium is crucial for the amplification and propagation of the model to match the data. If the Federal Reserve had exercised pre-emptive monetary policy in 2002Q1, the counterfactual analysis suggests that a higher interest rate would have stabilized house price and housing investment volatilities, but would have taken a big toll on real GDP: its volatility remains approximately the same, but the level of GDP contracts dramatically.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 192011.

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Length: 36 pages
Date of creation: Jun 2011
Handle: RePEc:hkm:wpaper:192011
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