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Carlos Garriga, Ph.D.

Federal Reserve Bank of St. Louis, Missouri, USA

Authors: Carlos Garriga and Aaron Hedlund

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.

Keywords: Housing; Consumption; Liquidity; Debt; Great Recession

JEL Classification Numbers: D31, D83, E21, E22, G11, G12, G21

Full Text:  “Housing Finance, Boom-Bust Episodes, and the Macroeconomy”