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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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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.

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  • Andersen, Thomas Barnebeck & Malchow-Møller, Nikolaj, 2015. "Innovations in mortgage finance and the onset of the Great Recession in a small open economy with a euro peg," Discussion Papers on Economics 5/2015, University of Southern Denmark, Department of Economics.
    • Handle: RePEc:hhs:sdueko:2015_005
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    File URL: https://www.sdu.dk/-/media/files/om_sdu/institutter/ivoe/disc_papers/disc_2015/dpbe5_2015.pdf
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    1. N. Bloom, 2016. "Fluctuations in uncertainty," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 4.
    2. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta†Eksten & Stephen J. Terry, 2018. "Really Uncertain Business Cycles," Econometrica, Econometric Society, vol. 86(3), pages 1031-1065, May.
    3. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Juan F. Rubio-Ramirez & Martin Uribe, 2011. "Risk Matters: The Real Effects of Volatility Shocks," American Economic Review, American Economic Association, vol. 101(6), pages 2530-2561, October.
    4. Benassy-Quere, Agnes & Coeure, Benoit & Jacquet, Pierre & Pisani-Ferry, Jean, 2010. "Economic Policy: Theory and Practice," OUP Catalogue, Oxford University Press, number 9780195322736.
    5. Michelle Alexopoulos & Jon Cohen, 2009. "Uncertain Times, uncertain measures," Working Papers tecipa-352, University of Toronto, Department of Economics.
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    Cited by:

    1. Thomas Barnebeck Andersen, 2023. "The Cost of a Currency Peg during the Great Recession," Open Economies Review, Springer, vol. 34(2), pages 255-279, April.

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    More about this item

    Keywords

    Global Financial Crisis; Great Recession; currency peg; financial innovation; adjustable-rate mortgages;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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