Fixed and variable-rate mortgages, business cycles and monetary policy
AbstractThe 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 InfoPaper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0903.
Length: 50 pages
Date of creation: Feb 2009
Date of revision:
Fixed/Variable-rate mortgages; monetary policy; housing market; collateral constraint;
Other versions of this item:
- Margarita Rubio, 2011. "Fixed‐ and Variable‐Rate Mortgages, Business Cycles, and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 657-688, 06.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-07 (All new papers)
- NEP-CBA-2009-03-07 (Central Banking)
- NEP-DGE-2009-03-07 (Dynamic General Equilibrium)
- NEP-MAC-2009-03-07 (Macroeconomics)
- NEP-MON-2009-03-07 (Monetary Economics)
- NEP-URE-2009-03-07 (Urban & Real Estate Economics)
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