Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation

43 Pages Posted: 28 May 2019

See all articles by Kristina Bluwstein

Kristina Bluwstein

Bank of England

Michał Brzoza‐Brzezina

National Bank of Poland

Paolo Gelain

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Marcin Kolasa

Warsaw School of Economics (SGH)

Date Written: May 3, 2019

Abstract

We study the implications of multiperiod mortgage loans for monetary policy, considering several realistic modifications—fixed interest rate contracts, a lower bound constraint on newly granted loans, and the possibility of the collateral constraint to become slack—to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective and may lead to asymmetric responses to positive and negative monetary shocks.

Keywords: mortgages, fixed-rate contracts, monetary policy

JEL Classification: E44, E51, E52

Suggested Citation

Bluwstein, Kristina and Brzoza‐Brzezina, Michał and Gelain, Paolo and Kolasa, Marcin, Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation (May 3, 2019). FRB of Cleveland Working Paper No. 19-10, Available at SSRN: https://ssrn.com/abstract=3393944

Kristina Bluwstein

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Michał Brzoza‐Brzezina

National Bank of Poland

Poland

Paolo Gelain (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Marcin Kolasa

Warsaw School of Economics (SGH) ( email )

Al. Niepodleglosci 162
Warsaw, 02-554
Poland

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