Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/175860
Authors: 
Finck, David
Schmidt, Jörg
Tillmann, Peter
Year of Publication: 
2018
Series/Report no.: 
Joint Discussion Paper Series in Economics 09-2018
Abstract: 
We study the role of monetary policy for the dynamics of U.S. mortgage debt, which is the largest component of household indebtedness. A timevarying parameter VAR model allows us to study the variation in the mortgage debt sensitivity to monetary policy. We find that an identically-sized policy shock became less effective over time. We use a DSGE model to show that a fall in the share of adjustable-rate mortgages (ARMs) could replicate this finding. Calibrating the model to the drop in the ARM share since the 1980s yields a drop in the sensitivity of housing debt to monetary policy which is quantitatively similar to the VAR results. A sacrifice ratio for mortgage debt reveals that a policy tightening directed towards reducing household debt became more expensive in terms of a loss in employment. Counterfactuals show that this result cannot be attributed to changes in monetary policy itself. The results are consistent with the "mortgage rate conundrum" found by Justiniano et al. (2017) and have strong implications for policy.
Subjects: 
mortgage debt
monetary policy
deleveraging
time-varying VAR
DSGE
JEL: 
E3
E5
G2
Document Type: 
Working Paper
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