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How monetary policy shaped the housing boom

Author: Itamar Drechsler; Alexi Savov; Philipp Schnabl; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2019.
Series: Working paper series (National Bureau of Economic Research), no. 25649.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
Between 2003 and 2006, the Federal Reserve raised rates by 4.25%. Yet it was precisely during this period that the housing boom accelerated, fueled by rapid growth in mortgage lending. There is deep disagreement about how, or even if, monetary policy impacted the boom. Using heterogeneity in banks' exposures to the deposits channel of monetary policy, we show that Fed tightening induced a large reduction in banks'  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Itamar Drechsler; Alexi Savov; Philipp Schnabl; National Bureau of Economic Research,
OCLC Number: 1090068549
Notes: "March 2019"
Description: 1 online resource (50 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 25649.
Responsibility: Itamar Drechsler, Alexi Savov, Philipp Schnabl.

Abstract:

Between 2003 and 2006, the Federal Reserve raised rates by 4.25%. Yet it was precisely during this period that the housing boom accelerated, fueled by rapid growth in mortgage lending. There is deep disagreement about how, or even if, monetary policy impacted the boom. Using heterogeneity in banks' exposures to the deposits channel of monetary policy, we show that Fed tightening induced a large reduction in banks' deposit funding, leading them to contract new on-balance-sheet lending for home purchases by 26%. However, an unprecedented expansion in privately-securitized loans, led by nonbanks, largely offset this contraction. Since privately-securitized loans are neither GSE-insured nor deposit-funded, they are run-prone, which made the mortgage market fragile. Consistent with our theory, the re-emergence of privately-securitized mortgages has closely tracked the recent increase in rates.

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