Nonlinearities of mortgage spreads over the business cycles

Chak Hung Jack Cheng () and Ching-Wai (Jeremy) Chiu

No 634, Bank of England working papers from Bank of England

Abstract: This paper provides robust evidence for the non-linear effects of mortgage spread shocks during recessions and expansions in the United States. Estimating a smooth-transition VAR model, we show that mortgage spread shocks hitting in recessionary regimes create significantly deeper and more protracted decrease in industrial production and prices, as well as a persistent fall in house prices. Evidence also suggests that shock propagation is amplified through the interaction of stock prices. Our empirical results complement the theoretical literature which emphasizes the role of occasionally binding collateral constraints and asset prices in explaining macroeconomic asymmetries.

Keywords: Mortgage spread shocks; smooth transition vector autoregressions; nonlinearities; financial frictions (search for similar items in EconPapers)
JEL-codes: C32 E32 E44 E52 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-12-09
New Economics Papers: this item is included in nep-ban, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0634

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