No. 275 Business Cycle Implications of Mortgage Spreads (Updated March 2014)

by Karl Walentin

September 2013 (Updated March 2014)

Abstract

How do aggregate quantities at the business cycle frequency respond to shocks to the spread between residential mortgage rates and government bonds? Using a structural VAR approach, we find that mortgage spread shocks impact the real economy by both economically and statistically significant magnitudes: a 100 basis point decline in the spread causes a peak increase in consumption, residential investment and GDP by 1.6 percent, 6.2 percent and 1.9 percent, respectively. These effects are magnified when the policy rate is held fixed, as was the case in the US during the recent implementation of unconventional monetary policy.

Keywords:

Sources of business cycles, unconventional monetary policy, credit supply, house prices, financial frictions.

JEL codes:

E21, E32, E44, E52, R21.