Monetary Policy, Hot Housing Markets and Leverage

FEDS Working Paper No. 2015-048

51 Pages Posted: 18 Jul 2015

See all articles by Christoph Ungerer

Christoph Ungerer

Board of Governors of the Federal Reserve System

Date Written: May 22, 2015


Expansionary monetary policy can increase household leverage by stimulating housing liquidity. Low mortgage rates encourage buyers to enter the housing market, raising the speed at which properties can be sold. Because lenders can resell seized foreclosure inventory at lower cost in such a hot housing market, ex-ante they are comfortable financing a larger fraction of the house purchase. Consistent with this mechanism, this study documents empirically that both the housing sales rate and loan-to-value ratios increase after expansionary monetary policy. Calibrating a New Keynesian macroeconomic model to fit the response of housing liquidity to monetary policy, the interaction between credit frictions and housing market search frictions generates endogenous movements in the loan-to-value ratio which amplify the economy's response to monetary policy.

Keywords: Credit frictions, Housing market, Monetary policy, Search frictions

JEL Classification: E32, E44, E52, R21

Suggested Citation

Ungerer, Christoph, Monetary Policy, Hot Housing Markets and Leverage (May 22, 2015). FEDS Working Paper No. 2015-048,, Available at SSRN: or

Christoph Ungerer (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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