The aim of this paper is twofold. First, I study how the proportion of fixed and variable-rate mortgages in an economy can affect the way shocks are propagated. Second, I analyze optimal implementable simple monetary policy rules and the welfare implications of this proportion. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given proportion of constrained households borrows at a variable rate, while the rest borrows at a fixed rate. The model predicts that in an economy with mostly variable-rate mortgages, an exogenous interest rate shock has larger effects on borrowers than in a fixed-rate economy. Aggregate effects are also larger for the variable-rate economy. For plausible parametrizations, differences are muted by wealth effects on labor supply and by the presence of savers. More persistent shocks, such as inflation target and technology shocks, cause larger aggregate differences. From a normative perspective I find that, in the presence of collateral constraints, the optimal Taylor rule is less aggressive against inflation than in the standard sticky-price model. Furthermore, for given monetary policy, a high proportion of fixed-rate mortgages is welfare enhancing.

/pdf/fixed-and-variable-rate-mortgages-business-cycles-and-nkdigq975n.pdf

Fixed and Variable-Rate Mortgages, Business Cycles and Monetary Policy

Fixed and variable-rate mortgages, business cycles and monetary policy

/pdf/fixed-and-variable-rate-mortgages-business-cycles-and-3tjso155nn.pdf

Fixed‐ and Variable‐Rate Mortgages, Business Cycles, and Monetary Policy

Optimal monetary stabilisation in the standard New Keynesian framework usually assumes a policy loss function from outside the model. In this paper, in contrast, the objective arises directly from the model. Credit constraints and sticky nominal debt contracts imply that monetary stabilisation has asymmetric impacts depending on whether consumers are credit-constrained. The policy problem is to maximise some weighting of the expected utility of the different types of consumer. Features of optimal stabilisation are derived that do not appear to be far out of line with empirical evidence for many countries but that clearly conflict with standard loss function results.

https://papers.ssrn.com/sol3/Delivery.cfm/ecoj_183.pdf?abstractid=547497&mirid=3

Monetary Stabilisation with Nominal Asymmetries

Modelling nominal debt contracts and fixed rate debt

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Modelling nominal debt contracts and fixed rate debt