The role of mortgages and consumer credit in the business cycle

Many households rely on mortgages and consumer credit to finance their expenditures. Lenders usually impose certain conditions on loans, such as limits on the amounts that can be borrowed. Conventional intuition suggests that such conditions are important for our understanding of the business cycle, for example because the effects of a negative macroeconomic shock could be exacerbated by a tightening of credit conditions. This dissertation studies the role of mortgages and consumer credit in macroeconomic booms and recessions. The analysis provides surprising findings and insights. In particular, it is explained why in a standard model with durable and non-durable consumption goods, the macroeconomic effects of borrowing limits can be the exact opposite of what the conventional intuition suggests. Moreover, empirical results challenge the common view that innovations in markets for mortgages and consumer credit can help to explain why macroeconomic fluctuations stabilized in the 1980’s. However, the structure of mortgage contracts does help to explain how busts in housing markets lead to persistent increases in the unemployment rate, as falls in house prices obstruct geographical mobility among credit-constrained homeowners.