Mortgage Guarantees and House Price Inflation: A Quantitative Analysis
James Kahn () and
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Omer Acikgoz: Yeshiva University
No 1075, 2013 Meeting Papers from Society for Economic Dynamics
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.
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1075
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