The Transmission from Households to the Real Economy: Evidence from Mortgage and Consumer Credit Markets

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

This award funds research that will use an innovative data source to examine how mortgage and consumer credit markets work to transmit economic shocks to the broader economy. They want to answer three research questions. First, they will measure the extent to which unanticipated changes (shocks) to mortgage interest rates cause changes in the US economy as a whole. They plan to do this using data from a commercial provider that has data on millions of US mortgages. Second, they want to examine how mortgage refinancing and competition between lenders enter into the picture. A homeowner can refinance to take advantage of lower interest rates; does this mean that shocks that increase rates have a different effect than shocks that raise rates? Third, they will measure how inequality is affected by the ways in which interest rate shocks affect household balance sheets. This third project will measure whether or not less wealthy households are more damaged by high mortgage interest rates; if the answer is yes, then interest rate shocks can exacerbate existing inequality. Graduate students will learn advanced techniques for the analysis of very large data sets by assisting in this project. The results will be valuable for regulators who create rules for markets for mortgages and other kinds of consumer credit, because they will help these policymakers understand how their decisions affect the broader economy. The project is also important for other economic policymakers who need to understand how housing markets affect the broader U.S. economy. The recent economic crisis has highlighted the importance of borrower balance sheets and mortgage and consumer credit markets for the propagation of economic shocks. The PIs develop new empirical evidence by using a comprehensive panel data set and by devising empirical strategies to isolate specific effects. They plan to study (i) transmission of shocks to mortgage interest rates onto the real economy through household balance sheets; (ii) how mortgage refinancing and intermediary competition help to determine the intensity of transmission of these shocks to household consumption and (iii) the redistributional consequences to household balance sheets of these shocks. The project provides an empirical assessment of how households responded to the prolonged reduction in mortgage interest rates through accommodative monetary policy during the economic crisis. Focusing on mortgages is an excellent way of measuring how households respond to an economic stimulus: the size and persistence of the change in the cost of servicing mortgage debt reduces payments each month and by thousands of dollars over the term of the loan. The team also plans to provide new evidence on the broader consequences of interest rates shocks by by exploiting regional variation in exposure to lower interest rates. They also assess the role of market structure in impacting consumption activity of households by influencing refinancing activity in response to government policies. Finally, their projects will also assess the impact of interest rate shocks and accommodative monetary policy on the redistribution, economic inequality, and overall consumption response of the economy.