The Negative Influence of the Tilt Effect and Lending Constraints on Housing Markets, Economic Recessions and the Phillips Curve

Abstract

Although economic theory suggests that inflation should not have any significant influence on real housing prices and activity, inflation variations are the main drivers of housing price variability (Tsataronis and Zhu, 2004) and increases in inflation have preceded housing and economic recessions. The combination of the tilt effect (Lessard and Modigliani, 1975) and rigid lending constraints can help us understand these relationships, as well as explaining the failure of the Phillips curve in the USA from the late 1960s onwards. Inflation-indexed mortgages can avoid the tilt effect and help mitigate this type of economic recession. The inflation indexing of the main economic contracts would help to implement measures of demand stimulus.

Keywords: Phillips curve, tilt effect, inflation, unemployment, mortgage, recession, housing, index, constraint

JEL Classification: E31, E32, E44, G21