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Mortgages and monetary policy

Author

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  • Carlos Garriga
  • Finn E. Kydland
  • Roman Šustek

Abstract

Mortgages are long-term nominal loans. Under incomplete asset markets, monetary policy is shown to affect housing investment and the economy through the cost of new mortgage borrowing and the value of payments on outstanding debt. These channels, distinct from traditional transmission of monetary policy, are evaluated within a general equilibrium model. Persistent monetary policy shocks, resembling the level factor in the nominal yield curve, have larger effects than transitory shocks, manifesting themselves as long-short spread. The transmission is stronger under adjustable- than fixed-rate mortgages. Higher, persistent, inflation benefits homeowners under FRMs, but hurts them under ARMs.

Suggested Citation

  • Carlos Garriga & Finn E. Kydland & Roman Šustek, 2013. "Mortgages and monetary policy," Working Papers 2013-37, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2013-037
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    More about this item

    Keywords

    Mortgages; debt servicing costs; monetary policy; transmission mechanism; housing investment;
    All these keywords.

    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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