Heterogeneous Spillovers of Housing Credit Policy

Abstract

We study the spillovers from government intervention in the mortgage market on households’ consumption. After an expansionary mortgage market operation, the consumption response of homeowners with mortgage debt is large and significant, while the consumption response of homeowners without the mortgage debt is small and insignificant. Non-homeowners also increase their consumption but less than mortgagors. We also find that expansionary policy significantly increases consumption inequality of mortgagors. We explain these facts through the lens of a life-cycle model with incomplete markets and endogenous housing choice. Reduction in credit rates creates extra wealth for the mortgagors while the reduction in interest rates shifts this wealth towards consumption. Increase in wealth is bigger for those with larger mortgage- this exacerbates consumption inequality.

Keywords: Mortgage Debt, Life-Cycle Models, Government-Sponsored Enterprises, Credit Policy

JEL Classification: E21, E44, R38, G28