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Monetary And Macroprudential Policies Under Fixed And Variable Interest Rates

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  • Rubio, Margarita

Abstract

In this paper, I analyze the ability of monetary policy to stabilize both the macroeconomy and financial markets under two different scenarios: fixed- and variable-rate mortgages. I develop and solve a new Keynesian dynamic stochastic general equilibrium model (DSGE) that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given share of constrained households borrows at a variable rate, whereas the rest borrow at a fixed rate. I consider two alternative ways of introducing a macroprudential approach to enhancing financial stability: one in which monetary policy, using the interest rate as an instrument, responds to credit growth; and a second one in which the macroprudential instrument is instead the loan-to-value ratio (LTV). The results show that when rates are variable, a countercyclical LTV rule performs better in stabilizing financial markets than monetary policy. However, when rates are fixed, even though monetary policy is less effective in stabilizing the macroeconomy, it does a good job in promoting financial stability.

Suggested Citation

  • Rubio, Margarita, 2019. "Monetary And Macroprudential Policies Under Fixed And Variable Interest Rates," Macroeconomic Dynamics, Cambridge University Press, vol. 23(3), pages 1024-1061, April.
    • Handle: RePEc:cup:macdyn:v:23:y:2019:i:03:p:1024-1061_00
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    Cited by:

    1. Agénor, Pierre-Richard & Flamini, Alessandro, 2022. "Institutional mandates for macroeconomic and financial stability," Journal of Financial Stability, Elsevier, vol. 62(C).
    2. Chunping Liu & Zhirong Ou, 2021. "What determines China's housing price dynamics? New evidence from a DSGE‐VAR," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3269-3305, July.
    3. Michael Richter, 2017. "Asymmetric Effects on Financial Cycles in a Monetary Union with Diverging Country Preferences for Variable- and Fixed-Rate Mortgages," Review of Economics & Finance, Better Advances Press, Canada, vol. 7, pages 19-36, February.

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