Borrower heterogeneity within a risky mortgage-lending market

Katrin Rabitsch-Schilcher, Maria Teresa Punzi

Publication: Working/Discussion PaperWU Working Paper

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Abstract

We propose a model of a risky mortgage-lending market in which we take explicit account of heterogeneity in household borrowing conditions, by introducing two borrower types: one with a low loan-to-value (LTV) ratio, one with a high LTV ratio, calibrated to U.S. data. We use such framework to study a deleveraging shock, modeled as an increase in housing investment risk, that falls more strongly on, and produces a larger contraction in credit for high-LTV type borrowers, as in the data. We find that this deleveraging experience produces significant aggregate effects on output and consumption, and that the contractionary effects are orders of magnitudes higher in a model version that takes account of borrower heterogeneity, compared to a more standard model version with a representative borrower.
Original languageEnglish
DOIs
Publication statusPublished - 2017

Publication series

SeriesDepartment of Economics Working Paper Series
Number241

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 502046 Economic policy
  • 502047 Economic theory
  • 502018 Macroeconomics

WU Working Paper Series

  • Department of Economics Working Paper Series

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