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Macroeconomic effects of mortgage interest deduction

Cenkhan Sahin

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: This paper develops a general equilibrium model featuring tax deductible mortgage interest. There are two main results: (i) a higher mortgage interest deduction leads to higher house prices, more levered households, and a higher rate of mortgage default; (ii) when mortgage risk is high the presence of mortgage interest deduction leads to more volatile responses of the main macro-variables to exogenous shocks (i.e. preference, productivity, and mortgage riskiness shocks). The empirical and theoretical evidence presented support the idea that mortgage interest deductibility may be a relevant factor in the occurrence of homeowner foreclosures.

Keywords: Mortgage interest deduction; house prices; mortgage default; DSGE (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ger, nep-mac and nep-ure
Date: 2016-07
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Persistent link: http://EconPapers.repec.org/RePEc:dnb:dnbwpp:514

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