A number of studies (see, for example, Iacoviello (2005) or Calza et al (2009)) apply the nancial accelerator to the housing market, where a similar mechanism is at work. A reduction in interest rates increases the value of collateral (housing) by increasing the discounted value of future user costs. The borrowers' debt capacity and consequently the demand for housing increases further, generating an even larger increase in house prices. Persistence and ampli cation would be mutually reinforcing and propagate the effect of the initial shock to interest rates on housing activity. The studies predict the transmission channels to be stronger in countries with more developed mortgage markets. Higher.
