The Mortgage Credit Channel of Macroeconomic Transmission

51 Pages Posted: 21 Feb 2016 Last revised: 28 Feb 2017

Daniel L. Greenwald

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

Date Written: November 23, 2016

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. 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

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

Daniel L. 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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