DEBT PROBLEMS: The Real Feel of Mortgage Payments

Haight, Alan Day

doi:10.1080/15357449.2003.11069183

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“…Nominal rates fall, making larger homes appear more affordable. This appearance is an illusion, for there will be less back-unloading to ease the burden of mortgage bills in the later years of repayment (Haight, 2003). Nonetheless, the illusion of affordability gives the disinflation a real effect: it increases spending on new homes, which shifts IS rightward-thereby providing an automatic inflation stabilizer.…”

Section: Using the Neutral Rate Schedules To Illustrate Monetary Polimentioning

confidence: 96%

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A Keynesian angle for the Taylor rule: mortgage rates, monthly payment illusion, and the scarecrow effect of inflation

Haight

2007

Journal of Post Keynesian Economics

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Without a little inflation, bad investment drives out good. Moderate inflation enhances productivity by functioning like a scarecrow: the rise in nominal mortgage rates deters myopic home buyers, who naively watch the nominal interest rate (in its guise as the payment-to-income ratio) rather than the real rate. The recent house price bubble is often blamed on predatory, subprime lending; but low inflation created an environment conducive to such practices. Here a modified IS curve is used to derive a schedule of the neutral real interest rate-where "neutral" has the meaning established by Keynes (1964, p. 243). This shows that, contrary to the Taylor principle, a stabilizing monetary policy reaction function can be flatter than 45 degrees. The central bank need not be as hawkish as is presumed by those who fear that inflation is everywhere and always a runaway phenomenon. Inflation-induced self-selection of borrowers can enhance growth. Overzealous central bank discipline can cause crowding out.

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Section: Using the Neutral Rate Schedules To Illustrate Monetary Polimentioning

confidence: 96%

“…That is, home buyers should focus on how they are spending their capitalized real income, not just their current nominal income. To facilitate that change of focus, Haight (2003) suggests an alternative to the payment-to-income ratio.…”

Section: Monthly Payment Illusionmentioning

confidence: 99%

A Keynesian angle for the Taylor rule: mortgage rates, monthly payment illusion, and the scarecrow effect of inflation

Haight

2007

Journal of Post Keynesian Economics

Self Cite

View full text Add to dashboard Cite

show abstract

DEBT PROBLEMS: The Real Feel of Mortgage Payments

Cited by 1 publication

References 0 publications

A Keynesian angle for the Taylor rule: mortgage rates, monthly payment illusion, and the scarecrow effect of inflation

A Keynesian angle for the Taylor rule: mortgage rates, monthly payment illusion, and the scarecrow effect of inflation

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