Business Cycle Implications of Mortgage Spreads

Riksbank Research Paper Series No. 106

Sveriges Riksbank Working Paper Series No. 275

30 Pages Posted: 18 Dec 2013 Last revised: 9 May 2014

Date Written: March 1, 2014

Abstract

How do aggregate quantities at the business cycle frequency respond to shocks to the spread between residential mortgage rates and government bonds? Using a structural VAR approach, we find that mortgage spread shocks impact the real economy by both economically and statistically significant magnitudes: a 100 basis point decline in the spread causes a peak increase in consumption, residential investment and GDP by 1.6 percent, 6.2 percent and 1.9 percent, respectively. These effects are magnified when the policy rate is held fixed, as was the case in the US during the recent implementation of unconventional monetary policy.

Keywords: Sources of business cycles, unconventional monetary policy, credit supply, house prices, financial frictions

JEL Classification: E21, E32, E44, E52, R21

Suggested Citation

Walentin, Karl, Business Cycle Implications of Mortgage Spreads (March 1, 2014). Riksbank Research Paper Series No. 106, Sveriges Riksbank Working Paper Series No. 275 , Available at SSRN: https://ssrn.com/abstract=2350765 or http://dx.doi.org/10.2139/ssrn.2350765

Karl Walentin (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

HOME PAGE: http://www.riksbank.com/research/walentin

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