Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter?

Tommaso Monacelli, Livio Stracca and Alessandro Calza

No 6231, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the role of institutional characteristics of mortgage markets in affecting the strength and timing of the effects of monetary policy shocks on house prices and consumption in a sample of OECD countries. With frictionless credit markets, those characteristics should in principle be immaterial for the transmission of monetary impulses. We document three facts: (1) there is significant divergence in the structure of mortgage markets across the main industrialized countries; (2) at the business cycle frequency, the correlation between consumption and house prices increases with the degree of flexibility/development of mortgage markets; (3) the transmission of monetary policy shocks on consumption and house prices is stronger in countries with more flexible/developed mortgage markets. We then build a two-sector dynamic general equilibrium model with price stickiness and collateral constraints, where the ability of borrowing is endogenously linked to the nominal value of a durable asset (housing). We study how the response of consumption to monetary policy shocks is affected by alternative values of three key institutional parameters: (i) down-payment rate; (ii) mortgage repayment rate; (iii) interest rate mortgage structure (variable vs. fixed interest rate). In line with our empirical evidence, the sensitivity of consumption to monetary policy shocks increases with lower values of (i) and (ii), and is larger under a variable-rate mortgage structure.

Keywords: Collateral constraint; House prices; Monetary policy; Mortgage markets (search for similar items in EconPapers)
JEL-codes: E21 E44 E52 (search for similar items in EconPapers)
Date: 2007-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (74)

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Working Paper: Mortgage markets, collateral constraints, and monetary policy: Do institutional factors matter? (2006)
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