The Credit Supply Channel of Monetary Policy Tightening and its Distributional Impacts
This paper studies how tightening monetary policy transmits to the economy through the mortgage market and sheds new light on the distributional consequences at both the individual and regional levels. We find that credit supply factors, specifically restrictions on the debt-to-income (DTI) ratio, account for the majority of the decline in mortgages. These effects are even more pronounced for young and middle-income borrowers who find themselves excluded from the credit market. Also, regions with historically high DTI ratios exhibited greater reductions in mortgage originations, house prices, and consumption.
We thank Justin Contat, Will Doerner, and seminar participants at the FHFA for comments. This paper is also an FHFA Working Paper and available here: https://www.fhfa.gov/papers/wp2303.aspx. Any errors or omissions are the sole responsibility of the authors. The views expressed in this paper are solely those of the authors and not necessarily those of the Federal Housing Finance Agency, the U.S. Government, or the National Bureau of Economic Research.