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Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation

Kristina Bluwstein, Michal Brzoza-Brzezina, Paolo Gelain () and Marcin Kolasa ()

No 201910, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We study the implications of multiperiod mortgage loans for monetary policy, considering several realistic modifications?fixed interest rate contracts, a lower bound constraint on newly granted loans, and the possibility of the collateral constraint to become slack?to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective and may lead to asymmetric responses to positive and negative monetary shocks.

Keywords: mortgages; fixed-rate contracts; monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2019-05-03
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Related works:
Journal Article: Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation (2020) Downloads
Working Paper: Multi-period loans, occasionally binding constraints and monetary policy: a quantitative evaluation (2019) Downloads
Working Paper: Multi-period loans, occasionally binding constraints and Monetary policy: a quantitative evaluation (2018) Downloads
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DOI: 10.26509/frbc-wp-201910

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