Staff Working Paper No. 921
By Sevim Kösem
This paper studies housing and credit market implications of increasing income inequality and discusses how a low interest rate environment can alter its consequences. I develop an analytical general equilibrium model with a novel borrower risk composition channel of income inequality. Following a rise in income inequality house prices and mortgage debt decline, and aggregate default risk increases. I then show that low real rates mitigate the depressing effect of inequality on house prices at the cost of amplifying the aggregate default risk. Using a panel of US states and instrumental variables approach, I verify the model’s predictions.
Income inequality, mortgage debt and house prices
This is an online appendix to Staff Working Paper No. 921.
Appendix to Income inequality, mortgage debt and house prices