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Housing, mortgage bailout guarantees and the macro economy

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  • Jeske, Karsten
  • Krueger, Dirk
  • Mitman, Kurt

Abstract

What are the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (e.g., Fannie Mae)? A model with heterogeneous, infinitely lived households and competitive housing and mortgage markets is constructed to evaluate this question. Households can default on their mortgages via foreclosure. The bailout guarantee is a tax-financed mortgage interest rate subsidy. Eliminating this subsidy leads to a large decline in mortgage origination and increases aggregate welfare by 0.5% in consumption equivalent variation, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: it hurts low-income and low-asset households.

Suggested Citation

  • Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2013. "Housing, mortgage bailout guarantees and the macro economy," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 917-935.
    • Handle: RePEc:eee:moneco:v:60:y:2013:i:8:p:917-935
    DOI: 10.1016/j.jmoneco.2013.09.001
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