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What Are the Effects of Changes in Taxation and New Types of Mortgages on the Real Economy? The Case of Denmark during the 2000s

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  • Jesper Pedersen

    (Danmarks Nationalbank)

Abstract

What are the effects of introducing interest-only, flexiblerate mortgage contracts and a tax freeze on housing wealth for the real and financial economy? I study this within a DSGE model with housing, banking, and financial frictions, and the coexistence of flexible-rate, fixed-rate, and interest-only mortgage contracts. I find that the introduction and the adoption of flexible-rate and interest-only mortgage contracts together with a freeze of taxation of the housing wealth can explain 8 percent of the increase in the real house price in Denmark during the period 2004-06 and 0.75 percentage point of the output gap. The household debt-to-GDP ratio would have been almost constant instead of increasing by 20 percentage points. The analysis points to a more volatile Danish economy after the implementation of the structural changes to the economy.

Suggested Citation

  • Jesper Pedersen, 2019. "What Are the Effects of Changes in Taxation and New Types of Mortgages on the Real Economy? The Case of Denmark during the 2000s," International Journal of Central Banking, International Journal of Central Banking, vol. 15(5), pages 47-99, December.
    • Handle: RePEc:ijc:ijcjou:y:2019:q:5:a:2
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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