NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Mortgages and Monetary Policy

Carlos Garriga, Finn E. Kydland, Roman Sustek

NBER Working Paper No. 19744
Issued in December 2013, Revised in June 2016
NBER Program(s):EFG

Mortgages are long-term loans with nominal payments. Consequently, under incomplete asset markets, monetary policy can affect housing investment and the economy through the cost of new mortgage borrowing and real payments on outstanding debt. These channels, distinct from traditional real rate channels, are embedded in a general equilibrium model. The transmission mechanism is found to be stronger under adjustable- than fixed-rate mortgages. Further, monetary policy shocks affecting the level of the nominal yield curve have larger real effects than transitory shocks, affecting its slope. Persistently higher inflation gradually benefits homeowners under FRMs, but hurts them immediately under ARMs.

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Document Object Identifier (DOI): 10.3386/w19744

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