Mortgages and Monetary Policy

FRB of St. Louis Working Paper No. 2013-037A

59 Pages Posted: 7 Dec 2013

See all articles by Carlos Garriga

Carlos Garriga

Federal Reserve Banks - Research Division

Finn Kydland

Carnegie Mellon University - David A. Tepper School of Business; Norwegian School of Economics (NHH) - Department of Economics

Roman Šustek

Queen Mary, University of London

Multiple version iconThere are 3 versions of this paper

Date Written: December 5, 2013

Abstract

Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable - than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates.

Keywords: mortgages, debt servicing costs, monetary policy, transmission mechanism, housing investment

JEL Classification: E32, E52, G21, R21

Suggested Citation

Garriga, Carlos and Kydland, Finn E. and Šustek, Roman, Mortgages and Monetary Policy (December 5, 2013). FRB of St. Louis Working Paper No. 2013-037A. Available at SSRN: https://ssrn.com/abstract=2364038 or http://dx.doi.org/10.2139/ssrn.2364038

Carlos Garriga (Contact Author)

Federal Reserve Banks - Research Division ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States
(314) 444-7412 (Phone)
(314) 444-8731 (Fax)

Finn E. Kydland

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412 268-3691 (Phone)
412 268-7357 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

Roman Šustek

Queen Mary, University of London ( email )

Lincoln's Inn Fields
Mile End Rd.
London, E1 4NS
United Kingdom

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