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Nonlinear Effects of Mortgage Spreads Over the Business Cycle

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  • CHAK HUNG JACK CHENG
  • CHING‐WAI (JEREMY) CHIU

Abstract

This paper provides robust evidence for the nonlinear effects of mortgage spread shocks during recessions and expansions in the United States. Estimating a smooth‐transition vector autoregression (STVAR) model, we show that mortgage spread shocks hitting in a recessionary phase create significantly deeper and more protracted declines in consumption and housing market variables. In addition, we provide evidence that these mortgage spread shocks could be largely interpreted as credit supply shocks in the mortgage market. Our empirical results imply that unconventional monetary policy, such as the Federal Reserve's mortgage‐backed security purchase program, would be a more effective tool for stabilizing the economy during recessions than in expansions.

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  • Chak Hung Jack Cheng & Ching‐Wai (Jeremy) Chiu, 2020. "Nonlinear Effects of Mortgage Spreads Over the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(6), pages 1593-1611, September.
    • Handle: RePEc:wly:jmoncb:v:52:y:2020:i:6:p:1593-1611
    DOI: 10.1111/jmcb.12635
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    3. Liu, Lu, 2023. "Mortgage loan and housing market," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 736-749.
    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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