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The Mortgage Credit Channel of Macroeconomic Transmission

85 Pages Posted: 21 Feb 2016 Last revised: 5 Nov 2017

Daniel L. Greenwald

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: November 3, 2017

Abstract

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 — features that prove essential to reproducing observed debt dynamics. The resulting environment amplifies transmission from interest rates into debt, house prices, and economic activity. Monetary policy more easily stabilizes inflation, but contributes to larger fluctuations in credit growth. A relaxation of payment-to-income standards appears vital for explaining 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: mortgages, macroeconomics, housing, monetary policy, macroprudential policy, real estate, payment to income, loan to value, refinancing, prepayment

JEL Classification: E44, E52, G21

Suggested Citation

Greenwald, Daniel L., The Mortgage Credit Channel of Macroeconomic Transmission (November 3, 2017). MIT Sloan Research Paper No. 5184-16. Available at SSRN: https://ssrn.com/abstract=2735491 or http://dx.doi.org/10.2139/ssrn.2735491

Daniel Greenwald (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

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