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Monetary and macroprudential policy with foreign currency loans

Author

Listed:
  • Michał Brzoza-Brzezina

    (Narodowy Bank Polski
    Warsaw School Economics)

  • Marcin Kolasa

    (Narodowy Bank Polski
    Warsaw School Economics)

  • Krzysztof Makarski

    (Narodowy Bank Polski
    Warsaw School Economics
    Group for Research in Applied Economics (GRAPE))

Abstract

In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents' welfare. To this end we construct a small open economy model with financial frictions, where housing loans can be denominated in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that the presence of FCLs negatively affects the transmission of monetary policy and deteriorates the output-inflation volatility trade-off it faces. The trade-off can be improved with macroprudential policy but the outcomes are still worse than under this same policy mix applied to an economy with domestic currency debt. We also demonstrate that a high share of FCLs is harmful for social welfare, even if financial stability considerations are not taken into account. Finally, we show that regulatory policies that discriminate against FCLs may have a negative impact on economic activity and discuss the redistributive consequences of forced currency conversion of household debt.

Suggested Citation

  • Michał Brzoza-Brzezina & Marcin Kolasa & Krzysztof Makarski, 2017. "Monetary and macroprudential policy with foreign currency loans," GRAPE Working Papers 19, GRAPE Group for Research in Applied Economics.
  • Handle: RePEc:fme:wpaper:19
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    References listed on IDEAS

    as
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    Cited by:

    1. repec:eee:jmacro:v:54:y:2017:i:pb:p:306-331 is not listed on IDEAS
    2. Christophe André, 2016. "Household debt in OECD countries: stylised facts and policy issues," Chapters from NBP Conference Publications, Narodowy Bank Polski, Economic Research Department.
    3. Marie-Pierre HORY & Grégory LEVIEUGE & Daria ONORI, 2018. "Foreign currency denominated debt and the fiscal multiplier," LEO Working Papers / DR LEO 2583, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    4. repec:eee:macchp:v2-1427 is not listed on IDEAS
    5. Marcin Kolasa, 2016. "Equilibrium foreign currency mortgages," Working Papers 2016-021, Warsaw School of Economics, Collegium of Economic Analysis.
    6. Marcin Kolasa, 2015. "On the Limits of Macroprudential Policy," 2015 Meeting Papers 207, Society for Economic Dynamics.
    7. Poutineau, Jean-Christophe & Vermandel, Gauthier, 2017. "Global banking and the conduct of macroprudential policy in a monetary union," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 306-331.
    8. Michal Brzoza-Brzezina, 2014. "Financial Frictions and Macroprudential Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 10(2), pages 249-261, June.
    9. Mikael Juselius & Mathias Drehmann, 2015. "Leverage dynamics and the real burden of debt," BIS Working Papers 501, Bank for International Settlements.
    10. Rubio, Margarita, 2016. "Short and long-term interest rates and the effectiveness of monetary and macroprudential policies," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 103-115.
    11. Malgorzata Skibinska, 2017. "Transmission of monetary policy and exchange rate shocks under foreign currency lending," Working Papers 2017-027, Warsaw School of Economics, Collegium of Economic Analysis.
    12. Margarita Rubio, 2015. "Monetary and Macroprudential Policies under Fixed and Variable Interest Rates," Discussion Papers 2015/10, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    13. repec:mes:eaeuec:v:55:y:2017:i:5:p:420-452 is not listed on IDEAS
    14. Greenwood-Nimmo, Matthew & Tarassow, Artur, 2016. "Monetary shocks, macroprudential shocks and financial stability," Economic Modelling, Elsevier, vol. 56(C), pages 11-24.
    15. Fernando Garcia-Barragan & Guangling Liu, 2017. "Capital controls and foreign currency denomination," Working Papers 671, Economic Research Southern Africa.

    More about this item

    Keywords

    foreign currency loans; monetary policy; macroprudential policy; DSGE models;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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