The Macroeconomic Effects of Government Asset Purchases: Evidence from Postwar U.S. Housing Credit Policy*

Andrew J Fieldhouse,Karel Mertens,Morten O Ravn

doi:10.1093/qje/qjy002

Abstract

We document the portfolio activity of federal housing agencies and provide evidence on its impact on mortgage markets and the economy. Through a narrative analysis, we identify historical policy changes leading to expansions or contractions in agency mortgage holdings. Based on those regulatory events that we classify as unrelated to short-run cyclical or credit market shocks, we find that an increase in mortgage purchases by the agencies boosts mortgage lending, in particular refinancing, and lowers mortgage rates. Agency purchases influence prices in other asset markets, stimulate residential investment and expand homeownership. Using information in GSE stock prices to construct an alternative instrument for agency purchasing activity yields very similar results as our benchmark narrative identification approach.

Highlights

The residential mortgage market in the United States is one of the largest capital markets in the world and by far the dominant source of credit for American households
We provide evidence that government mortgage purchases influence the volume and cost of mortgage lending
In order to tackle reverse causality, we make use of a number of policy changes that have impacted the ability of government agencies to acquire mortgage debt

Summary

Introduction

The residential mortgage market in the United States is one of the largest capital markets in the world and by far the dominant source of credit for American households. The mortgage market finances housing, which is a key component of both household wealth and aggregate spending, see e.g. Many accounts of the causes and propagating factors of the 2007/08 financial crisis assign an important role to a boom and bust in the availability of mortgage credit.. The US mortgage market is subject to heavy government involvement through various federal agencies, including the housing government-sponsored enterprises (GSEs). In the decades preceding the 2007/08 crisis, the various agencies collectively accumulated a large share of the total outstanding US mortgage debt on their balance sheets. We investigate whether agency portfolio purchases of mortgage assets influence the availability and cost of housing credit, and whether there are spillovers to other debt markets and economic activity more broadly

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