Monetary policy and the mortgage market

Join us for the Macroeconomics Research Seminar Series, Autumn Term 2020.

Dr Karin Kinnerud from the Department of Economics, at the BI Norwegian Business School will present their paper on Monetary policy and the mortgage market.

Abstract:

When a central bank changes the interest rate, it affects many households directly through their mortgage interest payments. If these households are constrained in their spending, this channel can have real and direct effects on aggregate demand. However, this channel is absent in standard frameworks of monetary policy. In such frameworks, changes in the policy rate affect consumption demand only via a forward-looking Euler equation.

To quantify the mortgage interest rate channel, I build a heterogeneous-agent life-cycle model with housing and long-term mortgage contracts. The illiquid nature of housing gives rise to wealthy hand-to-mouth households, and the existence of mortgage financing allows for households to be both relatively poor and have high exposures to changes in the interest rate. I find that the aggregate response of consumption to a real interest rate shock is highly dependent on the type of mortgage contracts available and the possibility to refinance.

In an economy with fixed-payment long-term mortgages, the response of consumption is 50 percent higher due to changes in mortgage interest rates and the endogenous response in house prices. However, in an economy with adjustable-rate mortgages, the consumption response is more than six times as large as compared to when fixed-rate mortgages are used. Hence, a detailed understanding of the contract structures in the mortgage market is an important input into the analysis of monetary policy.

This seminar will be held via zoom on 27 November 2020 at 16.00. This event is open to all levels of study and is also open to the public. To register your place and gain access to the webinar, please contact the seminar organisers.

This event is part of the Macroeconomics Research Seminar Series.