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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

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    11. 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.
    12. Bluwstein, Kristina, 2017. "Asymmetric Macro-Financial Spillovers," Working Paper Series 337, Sveriges Riksbank (Central Bank of Sweden).
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    Cited by:

    1. Pietrunti, Mario & Signoretti, Federico M., 2020. "Unconventional monetary policy and household debt: The role of cash-flow effects," Journal of Macroeconomics, Elsevier, vol. 64(C).
    2. Silvo, Aino & Verona, Fabio, 2020. "The Aino 3.0 model," Research Discussion Papers 9/2020, Bank of Finland.
    3. Hinterschweiger, Marc & Khairnar, Kunal & Ozden, Tolga & Stratton, Tom, 2021. "Macroprudential policy interactions in a sectoral DSGE model with staggered interest rates," Bank of England working papers 904, Bank of England.
    4. Kolasa Marcin, 2021. "On the Limits of Macroprudential Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(1), pages 281-307, January.
    5. Hohberger, Stefan & Priftis, Romanos & Vogel, Lukas, 2019. "The macroeconomic effects of quantitative easing in the euro area: Evidence from an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    6. Marcin Kolasa, . "Equilibrium foreign currency mortgages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    7. Apergis, Nicholas, 2021. "The role of housing market in the effectiveness of monetary policy over the Covid-19 era," Economics Letters, Elsevier, vol. 200(C).
    8. Harrison, Richard & Waldron, Matt, 2021. "Optimal policy with occasionally binding constraints: piecewise linear solution methods," Bank of England working papers 911, Bank of England.
    9. Michał Brzoza-Brzezina & Jacek Suda, 2021. "Are DSGE models irreparably flawed?," Bank i Kredyt, Narodowy Bank Polski, vol. 52(3), pages 227-252.
    10. Andrea Camilli & Marta Giagheddu, 2020. "Public debt and crowding-out: the role of housing wealth," Working Papers 441, University of Milano-Bicocca, Department of Economics, revised Oct 2020.

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    More about this item

    Keywords

    mortgages; fixed-rate contracts; monetary policy;
    All these keywords.

    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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