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MONETARY AND MACROPRUDENTIAL POLICIES UNDER FIXED AND VARIABLE INTEREST RATES

Published online by Cambridge University Press:  22 June 2017

Margarita Rubio
Margarita Rubio*
Affiliation:
University of Nottingham
*
Address correspondence to: Margarita Rubio, University of Nottingham, Sir Clive Granger Building, Nottingham NG7 2RD, UK; e-mail: margarita.rubio@nottingham.ac.uk.
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Abstract

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In this paper, I analyze the ability of monetary policy to stabilize both the macroeconomy and financial markets under two different scenarios: fixed- and variable-rate mortgages. I develop and solve a new Keynesian dynamic stochastic general equilibrium model (DSGE) that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given share of constrained households borrows at a variable rate, whereas the rest borrow at a fixed rate. I consider two alternative ways of introducing a macroprudential approach to enhancing financial stability: one in which monetary policy, using the interest rate as an instrument, responds to credit growth; and a second one in which the macroprudential instrument is instead the loan-to-value ratio (LTV). The results show that when rates are variable, a countercyclical LTV rule performs better in stabilizing financial markets than monetary policy. However, when rates are fixed, even though monetary policy is less effective in stabilizing the macroeconomy, it does a good job in promoting financial stability.

Keywords

Fixed-/Variable-Rate MortgagesMonetary PolicyMacroprudential PolicyLTVHousing MarketCollateral Constraint

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 3 , April 2019 , pp. 1024 - 1061
Copyright
Copyright © Cambridge University Press 2017 

Footnotes

I would like to thank Matteo Iacoviello, Fabio Ghironi, and Peter Ireland for their help in the development of the modeling framework. I would also like to acknowledge comments by conference participants at the MMF 2015, the Midwest Macro Meetings 2015, and the SAEe 2015, as well as an anonymous referee. Special thanks to José A. Carrasco-Gallego for his very useful comments and support. Part of this project was undertaken while the author was visiting the National Bank of Poland, for which she acknowledges their hospitality. All errors are mine.

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