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Fixed and variable-rate mortgages, business cycles and monetary policy

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  • Margarita Rubio

    ()
    (Banco de España)

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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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/09/Fic/dt0903e.pdf
File Function: First version, February 2009
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0903.

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Length: 50 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:bde:wpaper:0903

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Keywords: Fixed/Variable-rate mortgages; monetary policy; housing market; collateral constraint;

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Cited by:
  1. Rubio, Margarita, 2014. "Housing-market heterogeneity in a monetary union," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 163-184.
  2. Demary, Markus, 2009. "The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics," MPRA Paper 15978, University Library of Munich, Germany.
  3. Kydland, Finn & Rupert, Peter & Sustek, Roman, 2012. "Housing Dynamics over the Business Cycle," University of California at Santa Barbara, Economics Working Paper Series qt7bn5k73m, Department of Economics, UC Santa Barbara.
  4. Riccardo DiCecio & Edward Nelson, 2009. "Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model," NBER Working Papers 14894, National Bureau of Economic Research, Inc.
  5. Carlos Garriga & Finn E. Kydland & Roman Sustek, 2013. "Mortgages and Monetary Policy," NBER Working Papers 19744, National Bureau of Economic Research, Inc.
  6. Luisa Lambertini & Caterina Mendicino & Maria Teresa Punzi, 2011. "Leaning Against Boom-Bust Cycles in Credit and Housing Prices," Working Papers 201101, Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne, revised Mar 2011.
  7. 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.
  8. Tatiana Kirsanova & Jack Rogers, 2013. "Fixed versus Variable Rate Debt Contracts and Optimal Monetary Policy," Discussion Papers 1306, Exeter University, Department of Economics.
  9. 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.
  10. Zanetti, Francesco, 2014. "Housing and relative risk aversion," Economics Letters, Elsevier, vol. 123(1), pages 23-25.
  11. Margarita Rubio, 2014. "Macroprudential Policy Implementation in a Heterogeneous Monetary Union," Discussion Papers 2014/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  12. 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.

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