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Mortgage spreads, asset prices, and business cycles in emerging countries

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  • Horvath, Jaroslav
  • Rothman, Philip

Abstract

We investigate an unexplored link between the US mortgage spread and business cycle and asset price fluctuations in emerging market economies (EMEs). Controlling for changes in global financial risk, an increase in the US mortgage spread leads to substantially lower EME output, investment, consumption, house and stock prices, and to a contraction in lending by global banks to EMEs. The explanatory power of US mortgage spread shocks for EME macroeconomic fluctuations increases with EME exposure to lending by global banks. This explanatory power is greatly reduced when we turn off the response of EME stock prices to movements in the US mortgage spread in a counterfactual experiment, demonstrating the channel through which US mortgage spread shocks are transmitted to EMEs. The US mortgage spread is a key driver of business and asset price cycles in EMEs when extending the baseline model with additional domestic and foreign variables, and considering alternative country subgroups.

Suggested Citation

  • Horvath, Jaroslav & Rothman, Philip, 2021. "Mortgage spreads, asset prices, and business cycles in emerging countries," Journal of International Money and Finance, Elsevier, vol. 115(C).
    • Handle: RePEc:eee:jimfin:v:115:y:2021:i:c:s026156062100019x
    DOI: 10.1016/j.jimonfin.2021.102370
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    3. Hao Dong & Yingrong Zheng & Na Li, 2023. "Analysis of Systemic Risk Scenarios and Stabilization Effect of Monetary Policy under the COVID-19 Shock and Pharmaceutical Economic Recession," Sustainability, MDPI, vol. 15(1), pages 1-32, January.
    4. Zekeriya Yildirim & Mehmet Ivrendi, 2021. "Spillovers of US unconventional monetary policy: quantitative easing, spreads, and international financial markets," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-38, December.

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    More about this item

    Keywords

    Mortgage spreads; Asset prices; International business cycles; Emerging economies;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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