Income inequality, mortgage debt and house prices
Sevim Kösem ()
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Sevim Kösem: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
No 921, Bank of England working papers from Bank of England
This paper studies housing and credit market implications of increasing income inequality and discusses how a low interest rate environment can alter its consequences. I develop an analytical general equilibrium model with a novel borrower risk composition channel of income inequality. Following a rise in income inequality house prices and mortgage debt decline, and aggregate default risk increases. I then show that low real rates mitigate the depressing effect of inequality on house prices at the cost of amplifying the aggregate default risk. Using a panel of US states and instrumental variables approach, I verify the model’s predictions.
Keywords: Income inequality; mortgage lending; mortgage default; house prices; real interest rates; risk taking; shift-share instruments (search for similar items in EconPapers)
JEL-codes: D31 E44 E58 G21 R21 (search for similar items in EconPapers)
Pages: 63 pages
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0921
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