CREDIT AVAILABILITY AND ECONOMIC DECISIONS: SOME EVIDENCE FROM THE MORTGAGE AND HOUSING MARKETS

Abstract

THE CONJECTURE that plays an important role in decisions to purchase or consume recurs frequently in discussions of monetary policy, banking markets and consumption or investment decisions. Repetition of the phrase and of in official statements strengthens the impression that cost and have separable and independent effects on decisions to consume or invest. A large literature develops this theme.1 A common starting point of the argument is the observation that lenders use ''non-price rationing-terms and of the loan contract-to allocate loans. One interpretation of the observation is that the theoretical terms price and have many dimensions, so the cost per unit time paid by the borrower includes more than the explicit rate of interest written in the loan contract. That this is not the only, or even the principal, interpretation is clear from the many proposals to offset the effects of non-price rationing or availability conditions by government action. Many of the Federal government's programs have this rationale. Although is invoked to rationalize many phenomena, the argument has had greatest influence on and legislation to encourage housing. Much policy in the U.S. and in Western Europe is policy. The avowed purpose of the policies is to encourage the production of housing by increasing the of mortgage credit. The increased is financed by issuing bonds. General economic theory suggests that changes in the composition of financial assets-e.g., a sale of bonds and a purchase of mortgages-can affect the composition of real assets and spending decisions only by changing relative prices and the market value of wealth. Elsewhere [Arcelus and Meltzer, 1973], I have argued that there is no evidence of any effect of mortgage or on the number of houses produced or purchased if proper allowance is made for the method of financing the government's mortgage program. Specifically, the effect on housing of financing the mortgage purchase (or sale) offsets the effect of the increased (or reduced) of in the form of mortgages. The paper examines two additional types of evidence on availability. One comes from data on wealth and the composition of assets and liabilities. If the form in which credit becomes available affects the composition of spending, the large increase in mortgage relative to wealth or other liabilities