Faculty of Economics and Business Administration Publications Database

Government Policies, Residential Mortgage Defaults, and the Boom and Bust Cycle of Housing Prices

Ascheberg, Marius
Jarrow, Robert
Yildirim, Yildiray
Volume: 42
Number: 3
Pages: 627 - 661
Month: Fall 2014
Link External Source: Online Version
Year: 2014

We develop a micro-based macromodel for residential home prices in an economy where defaults on residential mortgages negatively affect housing prices. Our model enables us to study the impact of subprime defaults on prime borrowers and the impact of various government policies on the housing market boom and bust cycle. In this regard, our key conclusions are that (i) there is a contagion effect from subprime defaults to prime defaults due to the negative impact of subprime defaults and (ii) monetary policy is the most effective tool for decreasing mortgage defaults and increasing aggregate home prices in contrast to alternative government fiscal policies designed to loosen mortgage credit.