Multi-period loans, occasionally binding constraints and monetary policy: a quantitative evaluation

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

No 307, NBP Working Papers from Narodowy Bank Polski

Abstract: We study the implications of multi-period 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: 46
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: A previous version of the paper was circulated under the title “Monetary and macroprudential policy with multiperiod loans”. We would like to thank Francesca Barbiero, Markus Brunnermeier, Carlos Garriga, Richard Harrison, Matteo Iacoviello, Michael Kiley, Caterina Mendicino, Gisle J. Natvik, Johannes Pfeifer, Giorgio Primiceri, Soren Ravn, Roman Šustek, Lars Svensson, Andrea Tambalotti and Harald Uhlig for useful discussions, and two anonymous referees for suggestions to the earlier draft . We also benefi ted from comments by participants at the Computing in Economics and Finance conference in Oslo, Annual Meeting of the Society for Economic Dynamics in Toronto, Dynare conference in Paris, Central Bank Macroeconomic Modeling Workshop in Rome, Society for Nonlinear Dynamics and Econometrics Symposium in Oslo, WGEM meeting at the European Central Bank, NBP Summer Workshop in Warsaw and seminars at the Bank of Finland and the Halle Institute for Economic Research.
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Related works:
Journal Article: Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation (2020)
Working Paper: Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation (2019)
Working Paper: Multi-period loans, occasionally binding constraints and Monetary policy: a quantitative evaluation (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:307

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