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Quantitative easing and the loan to collateral value ratio

Tatiana Damjanovic () and Šarūnas Girdėnas ()

Journal of Economic Dynamics and Control, 2014, vol. 45, issue C, 146-164

Abstract: We study optimal monetary policy in a New Keynesian model at the zero bound interest rate where households use cash alongside house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall, we observe a decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or the loan to collateral value ratio. We also find that optimal monetary policy generates a large and persistent fall in the money multiplier in response to the drop in the loan to collateral value ratio.

Keywords: Optimal monetary policy; Zero lower bound; Quantitative easing; Money multiplier; Loan to value ratio; House prices (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 E58 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:45:y:2014:i:c:p:146-164

DOI: 10.1016/j.jedc.2014.05.013

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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