MONETARY AND MACROPRUDENTIAL POLICIES UNDER FIXED AND VARIABLE INTEREST RATES

Margarita Rubio

Macroeconomic Dynamics, 2019, vol. 23, issue 3, 1024-1061

Abstract: In this paper, I analyze the ability of monetary policy to stabilize both the macroeconomy and financial markets under two different scenarios: fixed- and variable-rate mortgages. I develop and solve a new Keynesian dynamic stochastic general equilibrium model (DSGE) that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given share of constrained households borrows at a variable rate, whereas the rest borrow at a fixed rate. I consider two alternative ways of introducing a macroprudential approach to enhancing financial stability: one in which monetary policy, using the interest rate as an instrument, responds to credit growth; and a second one in which the macroprudential instrument is instead the loan-to-value ratio (LTV). The results show that when rates are variable, a countercyclical LTV rule performs better in stabilizing financial markets than monetary policy. However, when rates are fixed, even though monetary policy is less effective in stabilizing the macroeconomy, it does a good job in promoting financial stability.

Date: 2019
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Working Paper: Monetary and Macroprudential Policies under Fixed and Variable Interest Rates (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:23:y:2019:i:03:p:1024-1061_00

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