Template-Type: ReDIF-Paper 1.0
Author-Name: Chiara Forlati
Author-X-Name-First: Chiara
Author-X-Name-Last: Forlati
Author-Workplace-Name: Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland
Author-Email: chiara.forlati@epfl.ch
Author-Name: Luisa Lambertini 
Author-X-Name-First: Luisa
Author-X-Name-Last: Lambertini
Author-Email: luisa.lambertini@epfl.ch
Author-Workplace-Name: Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland
Title: Risky Mortgages in a DSGE Model
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.
Length: 49 pages		
Creation-Date: 2010-11
Revision-Date:2010-11
Publication-Status: 
File-URL: http://infoscience.epfl.ch/record/164157/files/CFP2010_02.pdf
Number:
Classification-JEL: E32, E44, G01, R31
Keywords: Housing, Mortgage default, Mortgage Risk
Handle: RePEc:cif:wpaper:201002