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Mortgages and monetary policy

Listed author(s):
  • Garriga, Carlos

    ()

    (Federal Reserve Bank of St. Louis)

  • Kydland, Finn E.

    ()

    (University of California–Santa Barbara)

  • Šustek, Roman

    ()

    (Queen Mary, University of London)

Mortgages are long-term nominal loans. Under incomplete asset markets, monetary policy is shown to affect housing investment and the economy through the cost of new mortgage borrowing and the value of payments on outstanding debt. These channels, distinct from traditional transmission of monetary policy, are evaluated within a general equilibrium model. Persistent monetary policy shocks, resembling the level factor in the nominal yield curve, have larger effects than transitory shocks, manifesting themselves as long-short spread. The transmission is stronger under adjustable- than fixed-rate mortgages. Higher, persistent, inflation benefits homeowners under FRMs, but hurts them under ARMs.

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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: 65 pages
Date of creation: 2013
Date of revision: 25 Oct 2015
Handle: RePEc:fip:fedlwp:2013-037
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