Mellon Capital Management Corporation
NBER Working Papers and Publications
|October 2011||Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises|
with Dirk Krueger, Kurt Mitman: w17537
This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eli...
Published: Housing, Mortgage Bailout Guarantees and the Macro Economy (with K. Jeske and Kurt Mitman), Journal of Monetary Economics, Vol. 60, 917- 935.