Government Policies, Residential Mortgage Defaults, and the Boom and Bust Cycle of Housing Prices
Real Estate Economics, Forthcoming
Posted: 7 Feb 2013 Last revised: 25 May 2015
Date Written: January 22, 2013
We develop a micro based macro model for residential home prices in an economy where defaults on residential mortgages negatively affect housing prices. Our model enables us to study the impact of subprime defaults on prime borrowers and the impact of various government policies on the housing market boom and bust cycle. In this regard, our key conclusions are that: (i) there is a contagion effect from subprime defaults to prime defaults due to the negative impact of subprime defaults, and (ii) monetary policy is the most effective tool for decreasing mortgage defaults and increasing aggregate home prices in contrast to alternative government fiscal policies designed to loosen mortgage credit.
Keywords: subprime, home prices, mortgage defaults
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