Fixed‐ and Variable‐Rate Mortgages,Business Cycles,and Monetary Policy |
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Authors: | MARGARITA RUBIO |
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Institution: | Margarita Rubio is at the Bank of Spain, Staff Economist, International Financial Markets Division, Assoc. DG International Affairs (E‐mail: margarita.rubio@bde.es). |
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Abstract: | This paper studies how the proportion of fixed‐ and variable‐rate mortgages affects business cycles and welfare. I develop and solve a New Keynesian dynamic stochastic general equilibrium model with a housing market and a group of constrained individuals who need housing collateral to obtain loans. The model predicts that with mostly variable‐rate mortgages, an exogenous interest rate shock has larger effects on borrowers than in a fixed‐rate economy. For plausible parameterizations, aggregate differences are muted by wealth effects on labor supply and by the presence of savers. For given monetary policy, a high proportion of fixed‐rate mortgages is welfare enhancing. |
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Keywords: | E32 E44 E52 fixed/variable‐rate mortgages monetary policy housing market collateral constraint |
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