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Monetary policy in times of debt

Mario Pietrunti () and Federico Signoretti ()

No 1142, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We model an economy with long-term mortgages and show that some characteristics of mortgage contracts – such as the type of interest rate (adjustable versus fixed) and the loan-to-value ratio – matter for the transmission of monetary policy impulses, both conventional and unconventional. A conventional monetary policy shock has a stronger impact on output and inflation with adjustable-rate mortgages, also reflecting the higher sensitivity of installments to changes in the short-term rate. When households borrow at a fixed rate, unconventional monetary policy can stimulate the economy mainly through a redistribution of income from savers to borrowers, who have a higher marginal propensity to consume. The impact of monetary policy – both conventional and unconventional – is stronger when the level of households' mortgage debt is high relative to housing wealth.

Keywords: long-term mortgages; monetary policy; income channel (search for similar items in EconPapers)
JEL-codes: E52 E58 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ure
Date: 2017-10
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1142_17

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