Mortgage Spreads, Asset Prices, and Business Cycles in Emerging Countries

We investigate an unexplored link between the US mortgage spread and business cycle and house price fluctuations in emerging market economies (EMEs). An increase in the US mortgage spread leads to substantially lower output, investment, consumption, house and stock prices, and to an improvement in the trade balance-to-output ratio in EMEs. We find that the financial channel is the main transmission mechanism through which US mortgage spread shocks affect business and house price cycles in EMEs. The US mortgage spread remains a key driver of aggregate economic activity in EMEs when extending the baseline model with alternative domestic and foreign variables, such as global financial risk, and considering alternative country subgroups.