Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter?

61 Pages Posted: 22 May 2008

See all articles by Alessandro Calza

Alessandro Calza

European Central Bank (ECB)

Tommaso Monacelli

Bocconi University - Department of Economics

Livio Stracca

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2007

Abstract

We study the role of institutional characteristics of mortgage markets in affecting the strength and timing of the effects of monetary policy shocks on house prices and consumption in a sample of OECD countries. With frictionless credit markets, those characteristics should in principle be immaterial for the transmission of monetary impulses. We document three facts: (1) there is significant divergence in the structure of mortgage markets across the main industrialized countries; (2) at the business cycle frequency, the correlation between consumption and house prices increases with the degree of flexibility/development of mortgage markets; (3) the transmission of monetary policy shocks on consumption and house prices is stronger in countries with more flexible/developed mortgage markets. We then build a two-sector dynamic general equilibrium model with price stickiness and collateral constraints, where the ability of borrowing is endogenously linked to the nominal value of a durable asset (housing). We study how the response of consumption to monetary policy shocks is affected by alternative values of three key institutional parameters: (i) down-payment rate; (ii) mortgage repayment rate; (iii) interest rate mortgage structure (variable vs. fixed interest rate). In line with our empirical evidence, the sensitivity of consumption to monetary policy shocks increases with lower values of (i) and (ii), and is larger under a variable-rate mortgage structure.

Keywords: Collateral constraint, house prices, monetary policy, mortgage markets

JEL Classification: E21, E44, E52

Suggested Citation

Calza, Alessandro and Monacelli, Tommaso and Stracca, Livio, Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter? (April 2007). , Vol. , pp. -, 2007. Available at SSRN: https://ssrn.com/abstract=1135471

Alessandro Calza (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Tommaso Monacelli

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Livio Stracca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

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