Working Paper: NBER ID: w19744
Authors: Carlos Garriga; Finn E. Kydland; Roman Sustek
Abstract: 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.
Keywords: mortgages; monetary policy; housing investment
JEL Codes: E32; E52; G21; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy (E52) | Housing investment (R31) |
| Downward shift in nominal yield curve (E43) | Housing investment (R31) |
| Persistently higher inflation (E31) | Redistribution of income from capital owners to homeowners under FRMs (D33) |
| Persistently higher inflation (E31) | Redistribution of income from homeowners to capital owners under ARMs (D33) |
| Nominal interest rates (E43) | Cost of new mortgage loans (G21) |
| Inflation (E31) | Real value of mortgage payments on outstanding debt (G21) |