Monetary and macroprudential policy with foreign currency loans

Michal Brzoza-Brzezina, Marcin Kolasa and Krzysztof Makarski

Journal of Macroeconomics, 2017, vol. 54, issue PB, 352-372

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. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that the presence of FCLs negatively affects the transmission of monetary policy and deteriorates the output-inflation volatility trade-off it faces. The trade-off can be improved with macroprudential policy but the outcomes are still worse than under this same policy mix applied to an economy with domestic currency debt. We also demonstrate that a high share of FCLs is harmful for social welfare, even if financial stability considerations are not taken into account. Finally, we show that regulatory policies that discriminate against FCLs may have a negative impact on economic activity and discuss the redistributive consequences of forced currency conversion of household debt.

Keywords: Foreign currency loans; Monetary policy; Macroprudential policy; DSGE models (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
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)
Working Paper: Monetary and macroprudential policy with foreign currency loans (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:54:y:2017:i:pb:p:352-372

DOI: 10.1016/j.jmacro.2017.07.004

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