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Fixed‐ and Variable‐Rate Mortgages, Business Cycles, and Monetary Policy

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  • MARGARITA RUBIO

Abstract

The aim of this paper is twofold. First, I study how the proportion of fixed and variable-rate mortgages in an economy can affect the way shocks are propagated. Second, I analyze optimal implementable simple monetary policy rules and the welfare implications of this proportion. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given proportion of constrained households borrows at a variable rate, while the rest borrows at a fixed rate. The model predicts that in an economy with mostly variable-rate mortgages, an exogenous interest rate shock has larger effects on borrowers than in a fixed-rate economy. Aggregate effects are also larger for the variable-rate economy. For plausible parametrizations, differences are muted by wealth effects on labor supply and by the presence of savers. More persistent shocks, such as inflation target and technology shocks, cause larger aggregate differences. From a normative perspective I find that, in the presence of collateral constraints, the optimal Taylor rule is less aggressive against inflation than in the standard sticky-price model. Furthermore, for given monetary policy, a high proportion of fixed-rate mortgages is welfare enhancing.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 43 (2011)
Issue (Month): 4 (06)
Pages: 657-688

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Handle: RePEc:mcb:jmoncb:v:43:y:2011:i:4:p:657-688

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Guglielmo Maria Caporale & Mauro Costantini & Antonio Paradiso, 2012. "Re-examining the Decline in the US Saving Rate: The Impact of Mortgage Equity Withdrawal," Discussion Papers of DIW Berlin 1232, DIW Berlin, German Institute for Economic Research.
  2. Riccardo DiCecio & Edward Nelson, 2009. "Euro membership as a U.K. monetary policy option: results from a structural model," Working Papers 2009-012, Federal Reserve Bank of St. Louis.
  3. Margarita Rubio, 2009. "Housing market heterogeneity in a monetary union," Banco de Espa�a Working Papers 0916, Banco de Espa�a.
  4. Ørjan Robstad, 2014. "House prices, credit and the effect of monetary policy in Norway: Evidence from Structural VAR Models," Working Paper 2014/05, Norges Bank.
  5. Lambertini, Luisa & Mendicino, Caterina & Teresa Punzi, Maria, 2013. "Leaning against boom–bust cycles in credit and housing prices," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1500-1522.
  6. Francesco Zanetti & Haroon Mumtaz, 2013. "The Effect of Labor and Financial Frictions on Aggregate Fluctuations," Economics Series Working Papers 690, University of Oxford, Department of Economics.
  7. Carlos Garriga & Finn E. Kydland & Roman Sustek, 2013. "Mortgages and Monetary Policy," NBER Working Papers 19744, National Bureau of Economic Research, Inc.
  8. Finn E. Kydland & Peter Rupert & Roman Sustek, 2012. "Housing Dynamics over the Business Cycle," NBER Working Papers 18432, National Bureau of Economic Research, Inc.
  9. Tatiana Kirsanova & Jack Rogers, 2013. "Fixed versus Variable Rate Debt Contracts and Optimal Monetary Policy," Discussion Papers 1306, Exeter University, Department of Economics.
  10. Roman Sustek & Peter Rupert & Finn Kydland, 2012. "Housing Dynamics," 2012 Meeting Papers 315, Society for Economic Dynamics.
  11. Demary, Markus, 2009. "The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics," MPRA Paper 15978, University Library of Munich, Germany.
  12. Francesco Zanetti, 2014. "Housing and Relative Risk Aversion," Economics Series Working Papers 693, University of Oxford, Department of Economics.

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