Risky Mortgages in a DSGE Model

Chiara Forlati () and Luisa Lambertini

Working Papers from Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne

Abstract: This paper develops a DSGE model with housing, risky mortgages and endogenous default. Housing investment is subject to idiosyncratic risk and some mortgages are defaulted in equilibrium. An unanticipated increase in the standard deviation of housing investment produces a credit crunch where delinquencies and mortgage interest rates increase, lending is curtailed, and aggregate demand for non-durable goods falls. The economy experiences a recession as a consequence of the credit crunch. The paper compares economies that differ only in the riskiness of housing investment. Economies with lower risk are characterized by lower steady-state mortgage default rates and higher loan-to-value and leverage ratios. The macroeconomic effects of an unanticipated increase in housing investment risk are amplified in high-leverage economies. Monetary policy plays an important role in the transmission of housing investment risk, as inertial interest rate rules generate deeper output contractions.

Keywords: Housing; Mortgage default; Mortgage Risk (search for similar items in EconPapers)
JEL-codes: E32 E44 G01 R31 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2010-11, Revised 2010-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Risky Mortgages in a DSGE Model (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:cif:wpaper:201002

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