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Mortgage Guarantees and House Price Inflation: A Quantitative Analysis

James Kahn () and Omer Acikgoz
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Omer Acikgoz: Yeshiva University

No 1075, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: The U.S. economy witnessed dramatic and widespread house price inflation during the previous decade. We develop a quantitative model with incomplete markets and heterogeneous agents to investigate the impact of implicit mortgage guarantees and bailouts on house prices. In this environment, we show that the mispricing of risk can have a potentially enormous impact on house prices even in an environment with limited financial instruments. The quantitative results from the calibrated version of the model indicate that distortions stemming from implicit or explicit mortgage guarantees and bailouts of too-big-to-fail financial institutions likely played a significant role in the housing boom of the early 2000s.

Date: 2013
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