An economics paper co-authored by a University of South Carolina Upstate faculty member has won attention in England, and could influence thinking about the effect of mortgage spreads on the economy.
Jack Cheng, an assistant professor of economics at the George Dean Johnson, Jr. College of Business and Economics, said “mortgage spread” refers to the difference between the mortgage interest rate and the interest rate for government treasury bonds.
The spread reflects “the risk premium and other factors that are related to the mortgage market,” Cheng explained.
Cheng and the Bank of England’s Ching-Wai “Jeremy” Chiu co-authored the Bank of England Staff Working Paper No. 634: Nonlinearities of Mortgage Spreads Over the Business Cycle, which was then featured in an article on the Central Banking website.
In their research, the authors demonstrated that unexpected changes in the mortgage spread have a greater effect on the economy during times of recession than during expansion.
“The paper has vital policy implications,” Cheng said. “It’s saying that by influencing mortgage spreads … the Mortgage Backed Security Purchase Program (implemented by the Federal Reserve in 2009) would likely have a greater impact on the economy when the economy is in a recession.”
According to the Federal Reserve Bank of New York’s website, the program “was intended to provide support to mortgage lending and housing markets and to foster improved conditions in financial markets more generally.”
With publication by Central Banking, Cheng said the research is being recognized for its importance.
“It means that the research is important, and I hope that the results from this study will provide important insights to policy makers and help them implement appropriate policies when dealing with future crises,” Cheng said.