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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Monetary Policy, Hot Housing Markets and Leverage
Christoph Ungerer
Abstract

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.


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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.
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Keywords: Credit frictions; housing market; monetary policy; search frictions
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