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Multi-period loans, occasionally binding constraints and monetary policy: a quantitative evaluation

Author

Listed:
  • Kristina Bluwstein

    (Bank of England)

  • Michał Brzoza-Brzezina

    (Narodowy Bank Polski)

  • Paolo Gelain

    (Federal Reserve Bank of Cleveland)

  • Marcin Kolasa

    (Narodowy Bank Polski)

Abstract

We study the implications of multi-period mortgage loans for monetary policy, considering several realistic modifications – fixed interest rate contracts, a lower bound constraint on newly granted loans, and the possibility of the collateral constraint to become slack – to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective, and may lead to asymmetric responses to positive and negative monetary shocks.

Suggested Citation

  • Kristina Bluwstein & Michał Brzoza-Brzezina & Paolo Gelain & Marcin Kolasa, 2019. "Multi-period loans, occasionally binding constraints and monetary policy: a quantitative evaluation," NBP Working Papers 307, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:307
    Note: A previous version of the paper was circulated under the title “Monetary and macroprudential policy with multiperiod loans”. We would like to thank Francesca Barbiero, Markus Brunnermeier, Carlos Garriga, Richard Harrison, Matteo Iacoviello, Michael Kiley, Caterina Mendicino, Gisle J. Natvik, Johannes Pfeifer, Giorgio Primiceri, Soren Ravn, Roman Šustek, Lars Svensson, Andrea Tambalotti and Harald Uhlig for useful discussions, and two anonymous referees for suggestions to the earlier draft . We also benefi ted from comments by participants at the Computing in Economics and Finance conference in Oslo, Annual Meeting of the Society for Economic Dynamics in Toronto, Dynare conference in Paris, Central Bank Macroeconomic Modeling Workshop in Rome, Society for Nonlinear Dynamics and Econometrics Symposium in Oslo, WGEM meeting at the European Central Bank, NBP Summer Workshop in Warsaw and seminars at the Bank of Finland and the Halle Institute for Economic Research.
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    References listed on IDEAS

    as
    1. Jaromír Beneš & Kirdan Lees, 2010. "Multi-period fixed-rate loans, housing and monetary policy in small open economies," Reserve Bank of New Zealand Discussion Paper Series DP2010/03, Reserve Bank of New Zealand.
    2. Guerrieri, Luca & Iacoviello, Matteo, 2017. "Collateral constraints and macroeconomic asymmetries," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 28-49.
    3. Guerrieri, Luca & Iacoviello, Matteo, 2015. "OccBin: A toolkit for solving dynamic models with occasionally binding constraints easily," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 22-38.
    4. Alpanda, Sami & Zubairy, Sarah, 2017. "Addressing household indebtedness: Monetary, fiscal or macroprudential policy?," European Economic Review, Elsevier, vol. 92(C), pages 47-73.
    5. Bluwstein, Kristina, 2017. "Asymmetric Macro-Financial Spillovers," Working Paper Series 337, Sveriges Riksbank (Central Bank of Sweden).
    6. Marcin Bielecki & Michał Brzoza‐Brzezina & Marcin Kolasa & Krzysztof Makarski, 2019. "Could the Boom‐Bust in the Eurozone Periphery Have Been Prevented?," Journal of Common Market Studies, Wiley Blackwell, vol. 57(2), pages 336-352, March.
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    More about this item

    Keywords

    mortgages; fixed-rate contracts; monetary policy;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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