Housing and the Macroeconomy: The Role of Implicit Guarantees for Government-Sponsored Enterprises

Karsten Jeske and Dirk Krueger
Working Paper 2005-15
August 2005

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This paper studies the macroeconomic effects of implicit government guarantees of the obligations of government-sponsored enterprises. We construct a model with competitive housing and mortgage markets in which the government provides banks with insurance against aggregate shocks to mortgage default risk. We use this model to evaluate aggregate and distributional impacts of this government subsidy of owner-occupied housing. Preliminary findings indicate that the subsidy leads to higher equilibrium housing investment, higher mortgage default rates, and lower welfare. The welfare effects of this policy vary substantially across members of the population with different economic characteristics.

JEL classification: E21, G11, R21

Key words: housing, mortgage market, default risk

The authors thank seminar participants at the Wharton School, the Federal Reserve Bank of Atlanta, the Bank of Canada, Florida State University, and the University of Virginia for helpful comments. The views expressed here are the authors’ and are not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Karsten Jeske, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia, 30309-4470, 404-498-8825, 404-498-8956 (fax), karsten.jeske@atl.frb.org; or Dirk Krueger, Department of Economics, Johann Wolfgang Goethe-University Frankfurt, Mertonstr. 17, Postfach 81, 60054 Frankfurt am Main, Germany, 00 49 (0) 69 798 25289, and Faculty Research Fellow, National Bureau of Economic Research, Cambridge, Massachusetts and Research Affiliate, Centre for Economic Policy Research, London, United Kingdom, dirk.krueger@wiwi.uni-frankfurt.de.