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Nonlinearities of mortgage spreads over the business cycles

Author

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  • Cheng, Chak Hung Jack

    (George Dean Johnson, Jr. College of Business and Economics, University of South Carolina Upstate)

  • Chiu, Ching-Wai (Jeremy)

    (Bank of England)

Abstract

This paper provides robust evidence for the non-linear effects of mortgage spread shocks during recessions and expansions in the United States. Estimating a smooth-transition VAR model, we show that mortgage spread shocks hitting in recessionary regimes create significantly deeper and more protracted decrease in industrial production and prices, as well as a persistent fall in house prices. Evidence also suggests that shock propagation is amplified through the interaction of stock prices. Our empirical results complement the theoretical literature which emphasizes the role of occasionally binding collateral constraints and asset prices in explaining macroeconomic asymmetries.

Suggested Citation

  • Cheng, Chak Hung Jack & Chiu, Ching-Wai (Jeremy), 2016. "Nonlinearities of mortgage spreads over the business cycles," Bank of England working papers 634, Bank of England.
    • Handle: RePEc:boe:boeewp:0634
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    References listed on IDEAS

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    1. Andrew Filardo & Jouchi Nakajima, 2018. "Effectiveness of unconventional monetary policies in a low interest rate environment," BIS Working Papers 691, Bank for International Settlements.

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    More about this item

    Keywords

    Mortgage spread shocks; smooth transition vector autoregressions; nonlinearities; financial frictions;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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