Essays on Macroeconomics and Housing
The Great Recession of 2007-2009 and the preceding mortgage foreclosure crisis brought renewed attention to the links between the housing and mortgage markets and the macroeconomy in the United States. This dissertation presents three essays on macroeconomics and housing. Using a variety of methodological techniques, I focus in particular on the relationship between housing finance and household consumption. The first chapter in my dissertation assesses the aggregate and distributional consequences of policies that seek to reduce mortgage default by limiting a borrower's debt payment-to-income ratio. I document empirically that highly creditworthy borrowers appear constrained by the current institutional debt payment-to-income ratio limit. I propose a heterogeneous-agent life-cycle model with a competitive mortgage market, endogenous default on mortgages, and mortgage contract choice consistent with the empirical findings. In the calibrated model, I show that, relative to the current uniformly applied debt payment-to-income ratio cap, a new policy that combines a more strict limit with a costly option to relax the limit lowers default and improves aggregate welfare. The new policy is not Pareto improving, however, and the largest welfare gains accrue to households who have relatively high net worth but low current incomes. The second chapter uses household-level survey data to estimate the extent to which homeownership functions as a source of consumption insurance against income risk. I document empirically that homeowners experience smaller declines in nondurable consumption during periods of low earnings compared to renters and that, conditional on having low initial liquid wealth, owners use home equity extraction to smooth consumption. These novel stylized facts are consistent with the theory that home equity is a valuable but costly form of consumption insurance. They can additionally be used to discipline the calibration of a general class of incomplete-markets life-cycle models with costly illiquid asset adjustment. The third chapter leverages methods from the structural vector autoregression literature in macroeconomics to study the transmission of monetary policy shocks to the U.S. residential mortgage market. I find that, in response to contractionary monetary policy shocks, the mortgage interest rate increases, mortgage originations decrease, and the mortgage repayment rate declines as well. I also find that the pass-through of monetary policy shocks to the mortgage market was stronger during the Great Moderation. These results provide aggregate evidence in favor of the mortgage market as an important transmission channel for monetary policy.
macroeconomics; Economics; foreclosure; household consumption; housing; mortgage
Nimark, Preben Kristoffer
Mertens, Karel; Huckfeldt, Christopher Kiehl
Doctor of Philosophy
dissertation or thesis