The Mortgage Credit Channel of Macroeconomic Transmission
85 Pages Posted: 21 Feb 2016 Last revised: 5 Nov 2017
Date Written: November 3, 2017
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: Suggested Citation