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Mortgages and Monetary Policy

  • Carlos Garriga

    ()

    (Federal Reserve Bank of St. Louis)

  • Finn E. Kydland

    ()

    (University of California-Santa Barbara (UCSB))

  • Roman Šustek

    ()

    (Queen Mary, School of Economics and Finance)

Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates.

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File URL: http://www.centreformacroeconomics.ac.uk/Discussion-Papers/2013/CFMDP2013-06-Paper.pdf
File Function: Revised version, 2016
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Paper provided by Centre for Macroeconomics (CFM) in its series Discussion Papers with number 1306.

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Length: 58 pages
Date of creation: Dec 2013
Date of revision: May 2016
Handle: RePEc:cfm:wpaper:1306
Contact details of provider: Web page: http://www.centreformacroeconomics.ac.uk/

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