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Multi-period loans, occasionally binding constraints and Monetary policy: a quantitative evaluation

Author

Listed:
  • Kristina Bluwstein

    (Bank of England)

  • Michał Brzoza-Brzezina

    (Narodowy Bank Polski)

  • Paolo Gelain

    (Federal Reserve Bank of Cleveland)

  • Marcin Kolasa

    (Narodowy Bank Polski)

Abstract

We study the implications of multi-period mortgage loans for monetary policy, considering several realistic modifications — fixed interest rate contracts, lower bound constraint on newly granted loans, and possibility for the collateral constraint to become slack — to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective, and may lead to asymmetric responses to positive and negative monetary shocks.

Suggested Citation

  • Kristina Bluwstein & Michał Brzoza-Brzezina & Paolo Gelain & Marcin Kolasa, 2018. "Multi-period loans, occasionally binding constraints and Monetary policy: a quantitative evaluation," Bank of England working papers 749, Bank of England.
    • Handle: RePEc:boe:boeewp:0749
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    Cited by:

    1. Pietrunti, Mario & Signoretti, Federico M., 2020. "Unconventional monetary policy and household debt: The role of cash-flow effects," Journal of Macroeconomics, Elsevier, vol. 64(C).
    2. Hohberger, Stefan & Priftis, Romanos & Vogel, Lukas, 2019. "The macroeconomic effects of quantitative easing in the euro area: Evidence from an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    3. Ekaterina Pirozhkova & Nicola Viegi, 2024. "The Bank Lending Channel of Monetary Policy Transmission in South Africa," Working Papers 202443, University of Pretoria, Department of Economics.
    4. Kolasa Marcin, 2021. "On the Limits of Macroprudential Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(1), pages 281-307, January.
    5. Apergis, Nicholas, 2021. "The role of housing market in the effectiveness of monetary policy over the Covid-19 era," Economics Letters, Elsevier, vol. 200(C).
    6. Chan, Ying Tung & Ji, Qiang & Zhang, Dayong, 2025. "The Macroeconomics of Strategic Petroleum Reserve," International Review of Economics & Finance, Elsevier, vol. 99(C).
    7. Elisa Guglielminetti & Michele Loberto, 2025. "Inflation expectations and price-setting decisions: insights from the housing market," Temi di discussione (Economic working papers) 1507, Bank of Italy, Economic Research and International Relations Area.
    8. Richard Harrison & Matt Waldron, 2021. "Optimal policy with occasionally binding constraints: piecewise linear solution methods," Bank of England working papers 911, Bank of England.
    9. Silvo, Aino & Verona, Fabio, 2020. "The Aino 3.0 model," Research Discussion Papers 9/2020, Bank of Finland.
    10. Gulan, Adam & Jokivuolle, Esa & Verona, Fabio, 2022. "Optimal bank capital requirements: What do the macroeconomic models say?," BoF Economics Review 2/2022, Bank of Finland.
    11. Marc Hinterschweiger & Kunal Khairnar & Tolga Ozden & Tom Stratton, 2021. "Macroprudential policy interactions in a sectoral DSGE model with staggered interest rates," Bank of England working papers 904, Bank of England.
    12. Michał Brzoza-Brzezina & Jacek Suda, 2021. "Are DSGE models irreparably flawed?," Bank i Kredyt, Narodowy Bank Polski, vol. 52(3), pages 227-252.
    13. Marcin Kolasa, 2022. "Equilibrium foreign currency mortgages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 168-186, July.
    14. Andrea Camilli & Marta Giagheddu, 2020. "Public debt and crowding-out: the role of housing wealth," Working Papers 441, University of Milano-Bicocca, Department of Economics, revised Oct 2020.
    15. Darracq Pariès, Matthieu & Kok, Christoffer & Rottner, Matthias, 2023. "Reversal interest rate and macroprudential policy," European Economic Review, Elsevier, vol. 159(C).

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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