Monetary and macroprudential policy with foreign currency loans

Marcin Kolasa, Michal Brzoza-Brzezina and Krzysztof Makarski

No 1783, Working Paper Series from European Central Bank

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 housing loans 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 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 short term slowdown. JEL Classification: E32, E44, E58

Keywords: DSGE models with banking sector; foreign currency loans; monetary and macroprudential policy (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1783.en.pdf (application/pdf)

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 (2014)
Working Paper: Monetary and macroprudential policy with foreign currency loans (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20151783

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().