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Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation
We study the implications of multiperiod mortgage loans for monetary policy, considering several realistic modifications?fixed interest rate contracts, a lower bound constraint on newly granted loans, and the possibility of the collateral constraint to become slack?to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints ...