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Mortgages and Monetary Policy

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Carlos Garriga & Finn E. Kydland & Roman Šustek, 2013. "Mortgages and Monetary Policy," Discussion Papers 1306, Centre for Macroeconomics (CFM), revised May 2016.
  • Handle: RePEc:cfm:wpaper:1306
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    More about this item

    Keywords

    Mortgages; Debt Servicing Costs; Monetary Policy; Transmission Mechanism; Housing Investment;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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