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Multi-period fixed-rate loans, housing and monetary policy in small open economies

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Abstract

We investigate the implications of the existence of multi-period fixed-rate loans for the behaviour of a small open economy exposed to finance shocks and housing boom-and-bust cycles. To this end, we propose a simple and analytically tractable method of incorporating multi-period debt into an otherwise standard consumer problem. Our simulations show that multi-period fixed-rate contracts can help insulate the economy from the adverse effects of particular shocks. This insulating mechanism is particularly effective for countries with high debt positions exposed to foreign exchange fluctuations, or countries operating a fixed exchange rate regime.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2010/03.

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Length: 29 p
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:nzb:nzbdps:2010/03

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Cited by:
  1. Mimir Yasin & Sunel Enes & Taşkın Temel, 2013. "Required reserves as a credit policy tool," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 13(1), pages 58, June.
  2. Chris Bloor & Rebecca Craigie & Anella Munro, 2012. "The macroeconomic effects of a stable funding requirement," Reserve Bank of New Zealand Discussion Paper Series, Reserve Bank of New Zealand DP2012/05, Reserve Bank of New Zealand.

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