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Real Effects of Nominal Interest Rates

Author

Listed:
  • Joshua K. Hausman

    (Ford School of Public Policy and Department of Economics, University of Michigan and NBER.(E-mail: hausmanj@umich.edu))

  • John V. Leahy
  • John Mondragon

    (Federal Reserve Bank of San Francisco (E-mail: john.mondragon@sf.frb.org))

  • Johannes F. Wieland

    (Federal Reserve Bank of San Francisco, Department of Economics, University of California, San Diego, and NBER. (E-mail: jfwieland@ucsd.edu))

Abstract

Nominal interest rates have real effects. Residential mortgages and other real world debt contracts require a sequence of constant nominal payments. Combined with payment-to-income constraints, these nominal payments force borrowers to take on less debt when nominal interest rates rise, regardless of the behavior of the real interest rate. Survey data shows that conditional on the real rate, higher nominal mortgage interest rates reduce home buying sentiment. And increases in nominal mortgage rates reduce mortgage origination more in cities where payment-to-income constraints are more likely to bind. We explore the macroeconomic implications of payment-to-income constraints in a new Keynesian model modified to include a credit good. The payment-to-income constraint amplifies the effect of current short-term nominal interest rates on output and inflation, making the model less forward-looking than the standard new Keynesian model.

Suggested Citation

  • Joshua K. Hausman & John V. Leahy & John Mondragon & Johannes F. Wieland, 2026. "Real Effects of Nominal Interest Rates," IMES Discussion Paper Series 26-E-08, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:26-e-08
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    File URL: https://www.imes.boj.or.jp/research/papers/english/26-E-08.pdf
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    More about this item

    Keywords

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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • 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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