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research article

Risky Mortgages in a DSGE Model

Forlati, Chiara
•
Lambertini, Luisa  
2011
International Journal of Central Banking

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 risk 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.

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Type
research article
Web of Science ID

WOS:000288372100014

Author(s)
Forlati, Chiara
Lambertini, Luisa  
Date Issued

2011

Published in
International Journal of Central Banking
Volume

7

Issue

1

Start page

285

End page

335

Subjects

Housing

•

Mortgage Default

•

Mortgage Risk

Note

JEL Codes: E32, E44, G01, R31.

URL

URL

http://www.ijcb.org/journal/ijcb11q1a13.htm
Editorial or Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
SFI-LL  
Available on Infoscience
March 9, 2011
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/65215
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