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Monetary policy in times of debt

Author

Listed:
  • Mario Pietrunti

    (Bank of Italy)

  • Federico M. Signoretti

    (Bank of Italy)

Abstract

We model an economy with long-term mortgages and show that some characteristics of mortgage contracts – such as the type of interest rate (adjustable versus fixed) and the loan-to-value ratio – matter for the transmission of monetary policy impulses, both conventional and unconventional. A conventional monetary policy shock has a stronger impact on output and inflation with adjustable-rate mortgages, also reflecting the higher sensitivity of installments to changes in the short-term rate. When households borrow at a fixed rate, unconventional monetary policy can stimulate the economy mainly through a redistribution of income from savers to borrowers, who have a higher marginal propensity to consume. The impact of monetary policy – both conventional and unconventional – is stronger when the level of households' mortgage debt is high relative to housing wealth.

Suggested Citation

  • Mario Pietrunti & Federico M. Signoretti, 2017. "Monetary policy in times of debt," Temi di discussione (Economic working papers) 1142, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1142_17
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    References listed on IDEAS

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    Cited by:

    1. Stefano Neri & Stefano Siviero, 2018. "The Non-Standard Monetary Policy Measures of the ECB: Motivations, Effectiveness and Risks," Credit and Capital Markets, Credit and Capital Markets, vol. 51(4), pages 513-560.
    2. Yakov Ben-Haim & Jan Willem van den End, 2019. "Fundamental uncertainty about the natural rate of interest: Info-gap as guide for monetary policy," DNB Working Papers 650, Netherlands Central Bank, Research Department.

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    More about this item

    Keywords

    long-term mortgages; monetary policy; income channel;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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