'Real-world' mortgages, consumption volatility and the low inflation environment
This paper considers the interaction between the microeconomic decisions facing households and the macroeconomic environment in a setting where households have `real-world' mortgage contracts. In particular, we consider the possible consequences of the important changes in the framework for setting monetary policy in the United Kingdom in recent decades that have coincided with a more stable and low inflation environment. We set a model of households with 'real-world' mortgages in a partial equilibrium overlapping generations framework calibrated to UK data. We find that the welfare gains of the change of regime would have been considerable. However, the baseline calibration of the model implies that the volatility of aggregate consumption growth would actually be higher in the steady state in the more stable environment of the 1990s regime. This is due to greater synchrony in the response of households to shocks, offsetting the smaller magnitude of macroeconomic shocks. This effect is amplified by higher levels of debt in the 1990s. The result that aggregate consumption volatility could be higher in the current regime suggests that the observed fall in aggregate consumption volatility cannot necessarily be attributed to the more stable macroeconomic environment and the role of mortgage debt. If this result applies, this would suggest that the observed fall in volatility may be due either to other factors or may be a transitional phenomenon rather than a feature of the new steady state.
|Date of creation:||Sep 2005|
|Date of revision:|
|Contact details of provider:|| Postal: Bank of England, Threadneedle Street, London, EC2R 8AH|
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Luca Benati, 2004.
"Evolving post-World War II UK economic performance,"
Bank of England working papers
232, Bank of England.
- Luca Benati, 2003. "Evolving Post-World War II U.K. Economic Performance," Computing in Economics and Finance 2003 171, Society for Computational Economics.
- John Y. Campbell & Joao F. Cocco, 2002.
"Household Risk Management and Optimal Mortgage Choice,"
Harvard Institute of Economic Research Working Papers
1946, Harvard - Institute of Economic Research.
- John Y. Campbell & João F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1449-1494.
- Joao Cocco & John Campbell, 2004. "Household Risk Management and Optimal Mortgage Choice," Econometric Society 2004 North American Winter Meetings 632, Econometric Society.
- Campbell, John & Cocco, Joao, 2003. "Household Risk Management and Optimal Mortgage Choice," Scholarly Articles 3157876, Harvard University Department of Economics.
- Joao Cocco & John Campbell, 2004. "Household Risk Management and Optimal Mortgage Choice," Econometric Society 2004 North American Winter Meetings 646, Econometric Society.
- John Y. Campbell & Joao F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," NBER Working Papers 9759, National Bureau of Economic Research, Inc.
- John Campbell & Joao F. Cocco, 2002. "Household Risk Management and Optimal Mortgage Choice," Computing in Economics and Finance 2002 47, Society for Computational Economics.
- Miles, David, 1997. "A Household Level Study of the Determinants of Incomes and Consumption," Economic Journal, Royal Economic Society, vol. 107(440), pages 1-25, January.
- Christopher D. Carroll, 2001.
"A Theory of the Consumption Function, with and without Liquidity Constraints,"
Journal of Economic Perspectives,
American Economic Association, vol. 15(3), pages 23-45, Summer.
- Christopher D. Carroll, 2001. "A Theory of the Consumption Function, With and Without Liquidity Constraints (Expanded Version)," NBER Working Papers 8387, National Bureau of Economic Research, Inc.
- Christopher D. Carroll, 2001. "Codes for A Theory of the Consumption Function, With and Without Liquidity Constraints," QM&RBC Codes 37, Quantitative Macroeconomics & Real Business Cycles.
- Julio J. Rotemberg & Michael Woodford, 1999.
"Interest Rate Rules in an Estimated Sticky Price Model,"
in: Monetary Policy Rules, pages 57-126
National Bureau of Economic Research, Inc.
- Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc.
- Miles, David K, 1997.
"Modelling the Impact of Demographic Change Upon the Economy,"
CEPR Discussion Papers
1762, C.E.P.R. Discussion Papers.
- Miles, David, 1999. "Modelling the Impact of Demographic Change upon the Economy," Economic Journal, Royal Economic Society, vol. 109(452), pages 1-36, January.
- Deng, Yongheng & Quigley, John M., 2004.
"Woodhead Behavior and the Pricing of Residential Mortgages,"
Berkeley Program on Housing and Urban Policy, Working Paper Series
qt85q0w8xj, Berkeley Program on Housing and Urban Policy.
- Yongheng Deng & John M. Quigley, 2003. "Woodhead Behavior and the Pricing of Residential Mortgages," Working Paper 8616, USC Lusk Center for Real Estate.
- Dr Martin Weale, 1997.
"Income distribution and income dynamics in the United Kingdom,"
NIESR Discussion Papers
116, National Institute of Economic and Social Research.
- Jayasri Dutta & J. A. Sefton & M. R. WEALE, 2001. "Income distribution and income dynamics in the United Kingdom," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(5), pages 599-617.
- Stephen Nickell & Tracy Jones & Glenda Quintini, 2000.
"A picture of job insecurity facing British men,"
LSE Research Online Documents on Economics
20141, London School of Economics and Political Science, LSE Library.
- Marjorie Flavin & Takashi Yamashita, 2002. "Owner-Occupied Housing and the Composition of the Household Portfolio," American Economic Review, American Economic Association, vol. 92(1), pages 345-362, March.
- Dhillon, Upinder S & Shilling, James D & Sirmans, C F, 1987. "Choosing between Fixed and Adjustable Rate Mortgages: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(2), pages 260-67, May.
- Fratantoni, Michael C, 2001. "Homeownership, Committed Expenditure Risk, and the Stockholding Puzzle," Oxford Economic Papers, Oxford University Press, vol. 53(2), pages 241-59, April.
- Paul Mizen & Boris Hofmann, 2002. "Base rate pass-through: evidence from banks' and building societies' retail rates," Bank of England working papers 170, Bank of England.
- Alm, James & Follain, James R., 1984. "Alternative Mortgage Instruments, the Tilt Problem, and Consumer Welfare," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(01), pages 113-126, March.
- Brueckner, Jan K, 1997. "Consumption and Investment Motives and the Portfolio Choices of Homeowners," The Journal of Real Estate Finance and Economics, Springer, vol. 15(2), pages 159-80, October.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Qiang Fu & Michael LaCour-Little & Kerry D. Vandell, 2003. "Commercial Mortgage Prepayments Under Heterogeneous Prepayment Penalty Structures," Journal of Real Estate Research, American Real Estate Society, vol. 25(3), pages 245-476.
When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:273. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Media Team)
If references are entirely missing, you can add them using this form.