Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Monetary Policy, Hot Housing Markets and Leverage
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.
Cite this item
Christoph Ungerer, Monetary Policy, Hot Housing Markets and Leverage, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2015-48, 22 May 2015.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
Keywords: Credit frictions; housing market; monetary policy; search frictions
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