Abstract
Abstract The usual approach in econometric modeling is to assume that the behavior of government agencies is exogenous. In this paper we have suggested that the policies of government agencies are not truly exogenous and should be studied in relation to the specific objectives pursued by these agencies. Within this framework, we investigated the implications of optimizing the behavior of two U.S. government agencies, Federal Home Loan Bank (FHLB) and Federal National Mortgage Association (FNMA), involved in the housing market. The technique we have utilized is dynamic programming. Based on the assumption that there agencies attempt to stabilize the housing market we have calculated the values for the optimal strategies in the past years and compared them with the historical patterns they have actually followed. Our interpretation of the behavior of these agencies is as follows: FHLB has a significant potential for housing stabilization. However, it has historically put more emphasis on keeping a uniform policy than stabilizing the housing activity. In this way, the role it has played in the housing market may be more destabilizing than stabilizing. On the other hand, FNMA's activity has had a rather uncertain effect on the housing stabilization. The conservative policies that FNMA has followed in the past are consistent with the uncertainties implicit in decision making but, at the same time, can be blamed for failing to create sufficient information regarding their effectiveness on the housing stabilization.
Published Version
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