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Mortgages and Monetary Policy

Author

Listed:
  • Roman Sustek

    (Queen and Mary University of London)

  • Finn Kydland

    (University of California, Santa Barbara)

  • Carlos Garriga

    (Federal Reserve Bank of St. Louis)

Abstract

Mortgages are a prime example of long-term nominal loans. As a result, under incomplete asset markets, monetary policy affects household decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. These channels are distinct from the transmission through the real interest rate. A general equilibrium model incorporating these features is developed. Persistent monetary policy shocks, resembling the level factor in the nominal yield curve, have larger real effects than transitory shocks. The transmission is stronger under adjustable- than fixed-rate mortgages. Higher inflation benefits homeowners under FRMs but hurts them under ARMs.

Suggested Citation

  • Roman Sustek & Finn Kydland & Carlos Garriga, 2015. "Mortgages and Monetary Policy," 2015 Meeting Papers 500, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:500
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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