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Housing Finance, Boom-Bust Episodes, and Macroeconomic Fragility

Author

Listed:
  • Carlos Garriga

    (Federal Reserve Bank of St. Louis)

  • Aaron Hedlund

    (University of Missouri)

Abstract

This paper analyzes how arrangements in the in the mortgage market impact the dynamics of housing (boom-bust episodes) and the economy using a structural equilibrium model with incomplete markets and endogenous adjustment costs. In response to mortgage rates and credit conditions, the model can generate movements in house prices, residential investment, and homeownership consistent with the U.S. housing boom-bust. The propagation to the macroeconomy is asymmetric with much higher consumption sensitivity during the bust than the boom due to the endogenous fragility caused by mortgage debt. Mortgages with adjustable-rate increase the sensitivity of house prices to credit conditions relative to an economy with fixed-rate loans without refinancing. Macro prudential policies can mitigate fragility by reducing the magnitude of house price movements without curtailing homeownership.

Suggested Citation

  • Carlos Garriga & Aaron Hedlund, 2018. "Housing Finance, Boom-Bust Episodes, and Macroeconomic Fragility," 2018 Meeting Papers 354, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:354
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    References listed on IDEAS

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    1. Christopher L Foote & Lara Loewenstein & Paul S Willen, 2021. "Cross-Sectional Patterns of Mortgage Debt during the Housing Boom: Evidence and Implications," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(1), pages 229-259.
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    4. Carlos Garriga & Aaron Hedlund, 2020. "Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession," American Economic Review, American Economic Association, vol. 110(6), pages 1603-1634, June.
    5. Kristopher Gerardi & Andreas Lehnert & Shane M. Sherlund & Paul Willen, 2008. "Making Sense of the Subprime Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 69-159.
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    8. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1449-1496.
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    Cited by:

    1. Yavuz Arslan & Bulent Guler & Burhan Kuruscu, 2020. "Credit Supply Driven Boom-Bust Cycles," Working Papers tecipa-664, University of Toronto, Department of Economics.

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