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Mortgages and monetary policy

  • Garriga, Carlos

    ()

    (Federal Reserve Bank of St. Louis)

  • Kydland, Finn E.

    ()

    (University of California–Santa Barbara)

  • Šustek, Roman

    ()

    (Queen Mary, University of London)

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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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-37.

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Length: 59 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:fip:fedlwp:2013-037
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