51 Pages Posted: 21 Feb 2016 Last revised: 28 Feb 2017
Date Written: November 23, 2016
I investigate how the structure of the mortgage market influences macroeconomic dynamics, using a general equilibrium framework with prepayable debt and a limit on the ratio of mortgage payments to income. This realistic environment amplifies transmission from interest rates into debt, house prices, and economic activity. Monetary policy can more easily stabilize inflation due to this amplification, but contributes to larger fluctuations in credit growth. A relaxation of payment-to-income standards appears essential to the recent boom. A cap on payment-to-income ratios, not loan-to-value ratios, is the more effective macroprudential policy for limiting boom-bust cycles.
Keywords: house prices, monetary policy, mortgages
JEL Classification: E44, E52, G21
Suggested Citation: Suggested Citation
Greenwald, Daniel L., The Mortgage Credit Channel of Macroeconomic Transmission (November 23, 2016). MIT Sloan Research Paper No. 5184-16. Available at SSRN: https://ssrn.com/abstract=2735491 or http://dx.doi.org/10.2139/ssrn.2735491