Macroeconomic effects of varied mortgage instruments studied using agent-based model simulations

Thorir Bjarnason (thorirb10@ru.is), Einar Jón Erlingsson (einare09@ru.is), Bulent Ozel (bulent.ozel@gmail.com), Hlynur Stefánsson (hlynur@ru.is), Jón Thor Sturluson (jonthor@hr.is) and Marco Raberto
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Thorir Bjarnason: School of Science and Engineering, Reykjavik University, Iceland
Einar Jón Erlingsson: School of Science and Engineering, Reykjavik University, Iceland
Bulent Ozel: LEE and Department of Economics, Universitat Jaume I, Castellón, Spain
Hlynur Stefánsson: School of Science and Engineering, Reykjavik University, Iceland
Jón Thor Sturluson: School of Science and Engineering, Reykjavik University, Iceland

No 2017/10, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: Mortgage instruments differ in many respects. Their microeconomic effects might be easily calculated but their effects on a macroeconomic level are not always easily understood. Agent-based models can be used to study the macroeconomic effects that emerge from the microeconomic behavior of multiple interacting agents. Using a macroeconomic model of a credit network economy we have found that inflation-indexed mortgages can mislead households’ expectations of risk, encouraging them to buy more housing due to their low initial amortizations which, in turn, stimulates housing prices. The results further hint that in long-run inflation-indexed mortgages create relatively more uneven housing wealth distribution in between households. We also find that the effectiveness of standard monetary policy tools is diminished when inflation-indexed mortgages are used. Banks partake in the interest rate risk with fixed rate mortgages but bear little or no risk with adjustable rate or inflation-indexed mortgages. We have seen in this study that mortgage types, macroprudential tools and other policy tools can be experimented on, give insights into the interplay between agents and insight into the effects that certain policy settings may have on a macroeconomic level.

Keywords: Credit cycles; mortgage; housing market; agent-based model; inflation-indexation (search for similar items in EconPapers)
JEL-codes: C63 E25 G21 R31 R38 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2017
New Economics Papers: this item is included in nep-cmp, nep-mac, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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