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Housing and the Macroeconomy: The Role of Implicit Guarantees for Government Sponsored Enterprises

  • Dirk Krueger
  • Karsten Jeske

This paper studies the macroeconomic effects of implicit government guarantees of the obligations of government-sponsored enterprises. We construct a model with competitive housing and mortgage markets in which the government provides banks with insurance against aggregate shocks to mortgage default risk. We use this model to evaluate aggregate and distributional impacts of this government subsidy of owner-occupied housing. Preliminary findings indicate that the subsidy leads to higher equilibrium housing investment, higher mortgage default rates, and lower welfare. The welfare effects of this policy vary substantially across members of the population with different economic characteristics.

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File URL: http://repec.org/sed2005/up.32063.1106089033.pdf
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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 242.

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Date of creation: 2005
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Handle: RePEc:red:sed005:242
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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  1. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2007. "A quantitative theory of unsecured consumer credit with risk of default," Working Papers 07-16, Federal Reserve Bank of Philadelphia.
  2. Michael Haliassos, Alexander Michaelides, 2000. "Portfolio Choice And Liquidity Constraints," Computing in Economics and Finance 2000 297, Society for Computational Economics.
  3. W. Scott Frame & Larry Wall, 2002. "Fannie Mae's and Freddie Mac's voluntary initiatives: Lessons from banking," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 45-59.
  4. W. Scott Frame & Larry Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43.
  5. Anthony Pennington-Cross, 2006. "The Value of Foreclosed Property," Journal of Real Estate Research, American Real Estate Society, vol. 28(2), pages 193-214.
  6. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October.
  7. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  8. João Cocco & Francisco Gomes & Pascal Maenhout, 1998. "Consumption and Portfolio Choice over the Life-Cycle," Center for Economic Studies - Discussion papers ces9805, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  9. Robert F. Martin Joseph W. Gruber, 2004. "Does Housing Wealth Make Us Less Equal? The Role of Durable Goods in the Distribution of Wealth," Econometric Society 2004 North American Summer Meetings 15, Econometric Society.
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