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Quantitative Easing and the Loan to Collateral Value Ratio

Listed author(s):
  • Tatiana Damjanovic

    ()

    (Exeter)

  • Sarunas Girdenas

    ()

    (Exeter)

We study monetary optimal policy in a New Keynesian model at the zero bound interest rate where households use cash alongside house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall, we observe a decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or the loan to collateral value ratio. We also find that optimal monetary policy generates a large and persistent fall in the money multiplier in response to the drop in the loan to collateral value ratio.

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File URL: http://www.st-andrews.ac.uk/~wwwecon/repecfiles/2/1405.pdf
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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201405.

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Date of creation: 17 May 2014
Handle: RePEc:san:cdmawp:1405
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