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Innovations in Mortgage Finance and the Onset of the Great Recession in a Small Open Economy with a Euro Peg

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  • Thomas Barnebeck Andersen

    (University of Southern Denmark)

  • Nikolaj Malchow-Møller

    (University of Southern Denmark)

Abstract

The Global Financial Crisis (GFC) of 2008 hit Denmark particularly hard. In this paper we argue that a combination of innovation in mortgage finance and the need to defend a euro-exchange rate peg was partly responsible. Sustained pressure against the Danish krone forced the central bank to increase policy interest rates consecutively in the last quarter of 2008. Monetary tightening in the midst of the GFC deepened the ongoing recession for the usual Keynesian aggregate demand reasons. Innovations in mortgage finance, which had made the economy more sensitive to changes in the policy rate, exacerbated this effect.

Suggested Citation

  • Thomas Barnebeck Andersen & Nikolaj Malchow-Møller, 2015. "Innovations in Mortgage Finance and the Onset of the Great Recession in a Small Open Economy with a Euro Peg," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 57(4), pages 711-734, December.
    • Handle: RePEc:pal:compes:v:57:y:2015:i:4:d:10.1057_ces.2015.10
    DOI: 10.1057/ces.2015.10
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    References listed on IDEAS

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