Discussion of “Risky Mortgages in a DSGE Model”
نویسنده
چکیده
This is an interesting paper on a timely topic. As the authors argue, the recent global financial crisis has its roots in increased mortgage delinquencies caused by the bursting of the housing bubble in the United States. By what mechanism does such an increase in mortgage delinquencies affect the rest of the economy? And how should policy react to it? To address these issues, the authors develop a dynamic stochastic general equilibrium model with endogenous defaults on mortgage loans. Specifically, they apply Bernanke and Gertler’s (1989) model of financial constraint to housing investment.1 The economy produces two kinds of goods: non-durable consumption goods and durable investment goods (“houses”). The value of the housing stock held by each individual is subject to idiosyncratic risk. Mortgage loans take the form of a debt contract, where borrowers who experience a sufficiently large decline in the value of their housing stock declare defaults. In the case of a default, the lender incurs a monitoring cost and seizes the collateral, i.e., the housing stock held by the defaulting borrower. Furthermore, prices of non-durable goods are sticky (prices of housing stock are flexible). Monetary policy is given by an interest rate rule of the Taylor type. The aggregate shock they focus on is the shock to the volatility of the idiosyncratic shock to the value of housing stock. Its fluctuations
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