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Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter?

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Author Info
Calza, Alessandro
Monacelli, Tommaso
Stracca, Livio

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Abstract

We study the role of institutional characteristics of mortgage markets in affecting the strength and timing of the effects of monetary policy shocks on house prices and consumption in a sample of OECD countries. With frictionless credit markets, those characteristics should in principle be immaterial for the transmission of monetary impulses. We document three facts: (1) there is significant divergence in the structure of mortgage markets across the main industrialized countries; (2) at the business cycle frequency, the correlation between consumption and house prices increases with the degree of flexibility/development of mortgage markets; (3) the transmission of monetary policy shocks on consumption and house prices is stronger in countries with more flexible/developed mortgage markets. We then build a two-sector dynamic general equilibrium model with price stickiness and collateral constraints, where the ability of borrowing is endogenously linked to the nominal value of a durable asset (housing). We study how the response of consumption to monetary policy shocks is affected by alternative values of three key institutional parameters: (i) down-payment rate; (ii) mortgage repayment rate; (iii) interest rate mortgage structure (variable vs. fixed interest rate). In line with our empirical evidence, the sensitivity of consumption to monetary policy shocks increases with lower values of (i) and (ii), and is larger under a variable-rate mortgage structure.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6231.

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Date of creation: Apr 2007
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Handle: RePEc:cpr:ceprdp:6231

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Related research
Keywords: collateral constraint; house prices; monetary policy; mortgage markets;

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Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ben S. Bernanke, 2007. "Housing, housing finance, and monetary policy: a symposium sponsored by the Federal Reserve Bank of Kansas City: opening remarks," Proceedings, Federal Reserve Bank of Kansas City, pages 1-20. [Downloadable!]
  2. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2008. "Ensuring Financial Stability: Financial Structure and the Impact of Monetary Policy on Asset Prices," CEPR Discussion Papers 6773, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Kai Carstensen & Oliver Hülsewig & Timo Wollmershäuser, 2009. "Monetary Policy Transmission and House Prices: European Cross-country Evidence," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  4. Hott, Christian, 2009. "Banks and Real Estate Prices," Working Papers 2009-8, Swiss National Bank. [Downloadable!]
  5. Bertrand Gruss & Silvia Sgherri, 2009. "The Volatility Costs of Procyclical Lending Standards: An Assessment Using a DSGE Model," Economics Working Papers ECO2009/07, European University Institute. [Downloadable!]
    Other versions:
  6. Federico di Pace, 2008. "Revisiting the Comovement Puzzle: the Input-Output Structure as an Additional Solution," Birkbeck Working Papers in Economics and Finance 0807, Birkbeck, Department of Economics, Mathematics & Statistics. [Downloadable!]
  7. Besley, Timothy J. & Meads, Neil & Surico, Paolo, 2008. "Household External Finance and Consumption," CEPR Discussion Papers 6934, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Richard Disney & Sarah Bridges & John Gathergood, 2006. "Housing Wealth and Household Indebtedness: Is there a Household 'Financial Accelerator'?," Working Papers 2006/12, Czech National Bank, Research Department. [Downloadable!]
  9. Dimitrios Christelis & Dimitris Georgarakos & Michael Haliassos, 2008. "Economic Integration and Mature Portfolios," CSEF Working Papers 194, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
  10. Matthieu Darracq Pariès & Alessandro Notarpietro, 2008. "Monetary policy and housing prices in an estimated DSGE model for the US and the euro area," Working Paper Series 972, European Central Bank. [Downloadable!]
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  12. Frank Smets, 2007. "Housing is the business cycle: commentary," Proceedings, Federal Reserve Bank of Kansas City, pages 235-243. [Downloadable!]
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  14. Salvatore Muzzicato & Roberto Sabbatini & Francesco Zollino, 2008. "Prices of residential property in Italy: constructing a new indicator," Questioni di Economia e Finanza (Occasional Papers) 17, Bank of Italy, Economic Research Department. [Downloadable!]
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    Other versions:
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