Mortgages and Monetary Policy

Carlos Garriga; Finn E. Kydland; Roman Šustek

doi:10.1093/rfs/hhx043

Mortgages and Monetary Policy

Carlos Garriga¹; Finn E. Kydland²; Roman Šustek³

¹ Federal Reserve Bank of St. Louis · ² University of California, Santa Barbara and NBER · ³ Queen Mary University of London and Centre for Macroeconomics

Review of Financial Studies 2017 open access

Mortgages are long-term loans with nominal payments. Consequently, under incomplete asset markets, monetary policy can affect housing investment and the economy through the cost of new mortgage borrowing and real payments on outstanding debt. These channels, distinct from traditional real rate channels, are embedded in a general equilibrium model. The transmission mechanism is found to be stronger under adjustable-than fixed-rate mortgages. Further, monetary policy shocks affecting the level of the nominal yield curve have larger real effects than transitory shocks, affecting its slope. Persistently higher inflation gradually benefits homeowners under FRMs, but hurts them immediately under ARMs.

DOI: 10.1093/rfs/hhx043
Volume: 30 (10)
Pages: 3337-3375
Language: en
Export: BibTeX
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