Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation

Abstract

We introduce multiperiod mortgage loans, fixed interest rate, a lower bound constraint on newly granted loans, and a possibly slack collateral constraint, in an otherwise standard Dynamic Stochastic General Equilibrium (DSGE) model with housing. Our nonlinear estimation shows that all those features are important to understand the evolution of mortgage debt during the recent U.S. housing market boom and bust. The transmission of monetary policy becomes dependent on the housing cycle, with weaker effects when house prices are high or start falling sharply. Higher average loan duration makes monetary policy less effective, eventually leading to asymmetric responses to positive and negative monetary shocks.

The COVID-19 Pandemic, Airbnb and Housing Market Dynamics in Warsaw

“…Moreover, the decrease in interest rates made housing investment even more attractive because it has been historically proven to be a good hedge against inflation. Nonetheless, the economic literature suggests that the impact of monetary policy depends on the housing cycle and is weaker when house prices are high (Bluwstein, Brzoza-Brzezina, Gelain and Kolasa 2020). Recent empirical evidence shows that the effects of monetary expansion during the Covid-19 pandemic were relatively limited (Apergis 2021).…”

Equilibrium Foreign Currency Mortgages

“…loans for house purchase), and perhaps also for credit-financed purchase of fixed assets by firms, so that the collateral is effectively established on newly acquired assets. The framework does not necessarily fit to other types of lending, including those resembling home equity lines of credit as considered in a DSGE framework by Bluwstein et al (2019), and for which a more valid collateral constraint would read L H,t + S t L F,t ≤ mP h,t h t instead of (7). Under this alternative constraint and absent risk considerations, households would be indifferent between domestic and foreign currency denomination of their debt.…”

“…Modeling collateral constraints in housing was pioneered by Iacoviello (2005), and the multi-period extensions can be found e.g. in Garriga et al (2017) or Bluwstein et al (2019). Pecuniary externalities associated with collateral prices are studied by e.g.…”

Monetary policy and housing market cycles

“…Financial frictions, which may be rooted in asymmetric information or limited commitment, lead lenders to not only charge a higher premium but also impose credit constraints on borrowers, such as in the form of collateral constraints. Thus, a contractionary monetary policy has a stronger effect on economic aggregates because credit constraints are more likely to be binding, and borrowers are not able to borrow the amount demanded when liquidity is scarce because of monetary tightening [see, e.g., Lin (2021); Bluwstein et al (2020); Bernstein (2021)]. As for the policy implications, if a contractionary policy exerts a stronger effect on house prices than an expansionary policy, the policymaker should consider the fact that the same size of monetary contractions and expansions could result in different-sized policy effects.…”