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Federal Reserve Bank of St. Louis
Working Papers
Mortgages and monetary policy
Carlos Garriga
Finn E. Kydland
Roman Šustek

Mortgages are long-term nominal loans. Under incomplete asset markets, monetary policy is shown to affect housing investment and the economy through the cost of new mortgage borrowing and the value of payments on outstanding debt. These channels, distinct from traditional transmission of monetary policy, are evaluated within a general equilibrium model. Persistent monetary policy shocks, resembling the level factor in the nominal yield curve, have larger effects than transitory shocks, manifesting themselves as long-short spread. The transmission is stronger under adjustable- than fixed-rate mortgages. Higher, persistent, inflation benefits homeowners under FRMs, but hurts them under ARMs.

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Carlos Garriga & Finn E. Kydland & Roman Šustek, Mortgages and monetary policy, Federal Reserve Bank of St. Louis, Working Papers 2013-37, 2013, revised 25 Oct 2015.
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Keywords: Mortgages; debt servicing costs; monetary policy; transmission mechanism; housing investment.
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