House price, mortgage premium, and business fluctuations

Nan-Kuang Chen (), Han-Liang Cheng and Ching-Sheng Mao

Economic Modelling, 2012, vol. 29, issue 4, 1388-1398

Abstract: This paper investigates the transmission mechanism of mortgage premium to characterize the relationship between the housing market and business cycle for the U.S. We find that mortgage premium is crucial for the amplification and propagation of the model to match the main properties of U.S. housing market and business cycles. The counterfactual analysis suggests that had the Federal Reserve raised the interest rate in 2003Q1, it would have curbed the housing market boom before the crisis, yet failed to alleviate the precipitous decline in housing market activity after the crisis. Moreover, the pre-emptive monetary policy aimed to contain the housing market boom can effectively lower volatilities of major economic aggregates; however, it also exerts a significantly negative effect on the levels of these economic aggregates. Thus, using monetary policy to stabilize asset price inflation involves a trade-off between the volatility and the level of economic activity.

Keywords: Mortgage premium; House price; DSGE (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 G1 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: House Price, Mortgage Premium, and Business Fluctuations (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:4:p:1388-1398

DOI: 10.1016/j.econmod.2012.02.019

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