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Nonlinearities of Mortgage Spreads Over the Business Cycles

This paper provides robust evidence for the non-linear effects of mortgage spread shocks during recessions and expansions in the United States. Estimating a smooth-transition VAR model, we show that mortgage spread shocks hitting in recessionary regimes create significantly deeper and more protracted decrease in industrial production and prices, as well as a persistent fall in house prices. Evidence also suggests that shock propagation is amplified through the interaction of stock prices. Our empirical results complement the theoretical literature which emphasizes the role of occasionally binding collateral constraints and asset prices in explaining macroeconomic asymmetries.