Business cycle implications of mortgage spreads.pdf.pdf

Journal of ary Economics 67 (2014) 62–77
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Journal of ary Economics
journal homepage: ate/jme
Business cycle implications of mortgage spreads
Karl Walentin n
Sveriges Riksbank, 103 37 Stockholm, Sweden
article info abstract
Article history: How do aggregate quantities at the business cycle frequency respond to shocks to the
Received 17 September 2013 spread between residential mortgage rates and government bonds? Using a structural
Received in revised form VAR approach, we find that mortgage spread shocks impact the real economy by both
2 July 2014 economically and statistically significant magnitudes: a 100 basis point decline in the
Accepted 14 July 2014
spread causes a peak increase in consumption, residential investment and GDP by
Available online 22 July 2014
percent, percent and percent, respectively. Presumably, these effects are magnified
Keywords: when the policy rate is held fixed, as was the case in the US during the recent
Sources of business cycles implementation of unconventional ary policy.
Unconventional ary policy
& 2014 Elsevier . All rights reserved.
Credit supply
House prices
Financial frictions
1. Introduction
What are the quantitative business cycle effects of time variation in the residential mortgage interest rate spread?
Surprisingly, this question is almost unexplored in the existing literature despite the substantial cyclical variation of this
spread in the data. While Hubbard and Mayer (2009), Guerrieri and Lorenzoni (2011) and Hall (2011a,b) all have referenced
the issue, none have empirically documented the relationship between mortgage spreads and aggregate quantities. We
define the mortgage spread as the difference between the average interest rate on newly issued mortgages at a given
maturity and the government bond rate of the corresponding maturity. By using this definition, we separate the mortgage
spread from the term premium. We restrict