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Macroeconomic effects of varied mortgage instruments studied using agent-based model simulations

Author

Listed:
  • Thorir Bjarnason

    () (School of Science and Engineering, Reykjavik University, Iceland)

  • Einar Jón Erlingsson

    () (School of Science and Engineering, Reykjavik University, Iceland)

  • Bulent Ozel

    () (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain)

  • Hlynur Stefánsson

    () (School of Science and Engineering, Reykjavik University, Iceland)

  • Jón Thor Sturluson

    () (School of Science and Engineering, Reykjavik University, Iceland)

  • Marco Raberto

    () (DIME-University of Genoa, Italy)

Abstract

Mortgage instruments differ in many respects. Their microeconomic effects might be easily calculated but their effects on a macroeconomic level are not always easily understood. Agent-based models can be used to study the macroeconomic effects that emerge from the microeconomic behavior of multiple interacting agents. Using a macroeconomic model of a credit network economy we have found that inflation-indexed mortgages can mislead households’ expectations of risk, encouraging them to buy more housing due to their low initial amortizations which, in turn, stimulates housing prices. The results further hint that in long-run inflation-indexed mortgages create relatively more uneven housing wealth distribution in between households. We also find that the effectiveness of standard monetary policy tools is diminished when inflation-indexed mortgages are used. Banks partake in the interest rate risk with fixed rate mortgages but bear little or no risk with adjustable rate or inflation-indexed mortgages. We have seen in this study that mortgage types, macroprudential tools and other policy tools can be experimented on, give insights into the interplay between agents and insight into the effects that certain policy settings may have on a macroeconomic level.

Suggested Citation

  • Thorir Bjarnason & Einar Jón Erlingsson & Bulent Ozel & Hlynur Stefánsson & Jón Thor Sturluson & Marco Raberto, 2017. "Macroeconomic effects of varied mortgage instruments studied using agent-based model simulations," Working Papers 2017/10, Economics Department, Universitat Jaume I, Castellón (Spain).
  • Handle: RePEc:jau:wpaper:2017/10
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    File URL: http://www.doctreballeco.uji.es/wpficheros/Bjarnason_et_al_10_2017.pdf
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    References listed on IDEAS

    as
    1. Alm, James & Follain, James R., 1984. "Alternative Mortgage Instruments, the Tilt Problem, and Consumer Welfare," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(01), pages 113-126, March.
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    More about this item

    Keywords

    Credit cycles; mortgage; housing market; agent-based model; inflation-indexation;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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