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Wages, inflation, and mortgage design

  • Nejadmalayeri, Ali
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    By virtue of creating asset-liability mismatch, conventional long-term, fixed-rate mortgage loans inherently introduce excess interest risk to the financial systems. Considering that inflation is in part the reason for this excess interest risk, it seems natural to redesign mortgages in such a way that over time mortgage payments could, at least in part, reflect inflation. In this paper, I show that by allowing payments to adjust to inflation, particularly that of wages, by incorporating a prespecified growth rate into mortgage payments, mortgage loans become more affordable while bank interest spreads become less volatile, making the banking system less unstable.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0148619510000470
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    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 63 (2011)
    Issue (Month): 5 (September)
    Pages: 503-516

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    Handle: RePEc:eee:jebusi:v:63:y:2011:i:5:p:503-516
    Contact details of provider: Web page: http://www.elsevier.com/locate/jeconbus

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    1. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Working Paper 9094, USC Lusk Center for Real Estate.
    2. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
    3. Hancock Diana & Passmore Wayne, 2009. "Three Initiatives Enhancing the Mortgage Market and Promoting Financial Stability," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(3), pages 1-25, March.
    4. David Hartzell & John S. Hekman & Mike E. Miles, 1987. "Real Estate Returns and Inflation," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(1), pages 617-637.
    5. Hoesli, Martin, 1993. "International evidence on real estate securities as an inflation hedge," ERES eres1993_108, European Real Estate Society (ERES).
    6. Kearl, J R, 1979. "Inflation, Mortgages, and Housing," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1115-38, October.
    7. Kenneth M. Lusht, 1978. "Inflation and Real Estate Investment Value," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 6(1), pages 37-49.
    8. Kau, James B, et al, 1992. "A Generalized Valuation Model for Fixed-Rate Residential Mortgages," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(3), pages 279-99, August.
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