Monetary and Macroprudential Policy with Foreign Currency Loans

34 Pages Posted: 19 Aug 2015

See all articles by Michal Brzoza-Brzezina

Michal Brzoza-Brzezina

National Bank of Poland; Warsaw School of Economics (SGH)

Marcin Kolasa

Warsaw School of Economics (SGH)

Krzysztof Makarski

National Bank of Poland; Warsaw School of Economics (SGH)

Multiple version iconThere are 2 versions of this paper

Date Written: September 10, 2014

Abstract

In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents’ welfare. To this end we construct a small open economy model with financial frictions where housing loans can be denominated in domestic or foreign currency. We calibrate the model for Poland -- a typical small open economy with a large share of foreign currency loans (FCL) -- and use it to conduct a series of simulations. They show that FCLs negatively affect the transmission of monetary policy. In contrast, their impact on the effectiveness of macroprudential policy is much weaker but positive. We also demonstrate that FCLs increase welfare when domestic interest rate shocks prevail and decrease it when risk premium (exchange rate) shocks dominate. Under a realistic calibration of the stochastic environment FCLs are welfare reducing. Finally, we show that regulatory policies that correct the share of FCLs may cause a cyclical slowdown.

Keywords: foreign currency loans, monetary and macroprudential policy

JEL Classification: E32, E44, E58

Suggested Citation

Brzoza-Brzezina, Michal and Kolasa, Marcin and Makarski, Krzysztof, Monetary and Macroprudential Policy with Foreign Currency Loans (September 10, 2014). Available at SSRN: https://ssrn.com/abstract=2646556 or http://dx.doi.org/10.2139/ssrn.2646556

Michal Brzoza-Brzezina (Contact Author)

National Bank of Poland ( email )

00-919 Warsaw
Poland

Warsaw School of Economics (SGH)

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

Marcin Kolasa

Warsaw School of Economics (SGH) ( email )

Al. Niepodleglosci 162
Warsaw, 02-554
Poland

Krzysztof Makarski

National Bank of Poland ( email )

00-919 Warsaw
Poland

Warsaw School of Economics (SGH)

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

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