Monetary and macroprudential policy with foreign currency loans

Michal Brzoza-Brzezina, Marcin Kolasa and Krzysztof Makarski

No 184, NBP Working Papers from Narodowy Bank Polski

Abstract: In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents’ welfare. To this end we construct a small open economy model with financial frictions where housing loans can be denominated in domestic or foreign currency. We calibrate the model for Poland - a typical small open economy with a large share of foreign currency loans (FCL) - and use it to conduct a series of simulations. They show that FCLs negatively affect the transmission of monetary policy. In contrast, their impact on the effectiveness of macroprudential policy is much weaker but positive. We also demonstrate that FCLs increase welfare when domestic interest rate shocks prevail and decrease it when risk premium (exchange rate) shocks dominate. Under a realistic calibration of the stochastic environment FCLs are welfare reducing. Finally, we show that regulatory policies that correct the share of FCLs may cause a cyclical slowdown.

Keywords: foreign currency loans; monetary and macroprudential policy; DSGE models with banking sector (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 (search for similar items in EconPapers)
Pages: 34
Date: 2014
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Monetary and macroprudential policy with foreign currency loans (2017)
Working Paper: Monetary and macroprudential policy with foreign currency loans (2017)
Working Paper: Monetary and macroprudential policy with foreign currency loans (2015)
Working Paper: Monetary and macroprudential policy with foreign currency loans (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:184

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