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Mortgage Guarantees and House Price Inflation: A Quantitative Analysis

Author

Listed:
  • James Kahn

    (Yeshiva University)

  • Omer Acikgoz

    (Yeshiva University)

Abstract

The U.S. economy witnessed dramatic and widespread house price inflation during the previous decade. We develop a quantitative model with incomplete markets and heterogeneous agents to investigate the impact of implicit mortgage guarantees and bailouts on house prices. In this environment, we show that the mispricing of risk can have a potentially enormous impact on house prices even in an environment with limited financial instruments. The quantitative results from the calibrated version of the model indicate that distortions stemming from implicit or explicit mortgage guarantees and bailouts of too-big-to-fail financial institutions likely played a significant role in the housing boom of the early 2000s.

Suggested Citation

  • James Kahn & Omer Acikgoz, 2013. "Mortgage Guarantees and House Price Inflation: A Quantitative Analysis," 2013 Meeting Papers 1075, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:1075
    as

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    References listed on IDEAS

    as
    1. Jack Favilukis & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2017. "The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk Sharing in General Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 125(1), pages 140-223.
    2. Krueger, Dirk & Jeske, Karsten & Mitman, Kurt, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," CEPR Discussion Papers 8624, C.E.P.R. Discussion Papers.
    3. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2011. "Winners and Losers in Housing Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 255-296, March.
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