Monetary and Macroprudential Policies under Fixed and Variable Interest Rates

Margarita Rubio

No 2015/10, Discussion Papers from University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM)

Abstract: In this paper, I analyze the ability of monetary policy to stabilize both the macroeconomy and nancial markets under two different scenarios: fixed and variable-rate mortgages. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given share of constrained households borrows at a variable rate, while the rest borrows at a fixed rate. I consider two alternative ways of introducing a macroprudential approach to enhance nancial stability: one in which monetary policy, using the interest rate as an instrument, responds to credit growth; and a second one in which the macroprudential instrument is instead the loan-to-value ratio (LTV). Results show that when rates are variable, a countercyclical LTV rule performs better to stabilize financial markets than monetary policy. However, when they are fixed, even though monetary policy is less effective to stabilize the macroeconomy, it does a good job to promote financial stability.

Keywords: Fixed/Variable-rate mortgages; monetary policy; macroprudential policy; LTV; housing market; collateral constraint (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-mon and nep-ure
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Related works:
Journal Article: MONETARY AND MACROPRUDENTIAL POLICIES UNDER FIXED AND VARIABLE INTEREST RATES (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:not:notcfc:15/10

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