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Fixed‐ and Variable‐Rate Mortgages, Business Cycles, and Monetary Policy
Author(s) -
RUBIO MARGARITA
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2011.00391.x
Subject(s) - economics , collateral , fixed interest rate loan , business cycle , shock (circulatory) , interest rate , welfare , monetary policy , variable (mathematics) , monetary economics , floating interest rate , econometrics , macroeconomics , finance , mathematics , medicine , market economy , mathematical analysis
This paper studies how the proportion of fixed‐ and variable‐rate mortgages affects business cycles and welfare. I develop and solve a New Keynesian dynamic stochastic general equilibrium model with a housing market and a group of constrained individuals who need housing collateral to obtain loans. The model predicts that with mostly variable‐rate mortgages, an exogenous interest rate shock has larger effects on borrowers than in a fixed‐rate economy. For plausible parameterizations, aggregate differences are muted by wealth effects on labor supply and by the presence of savers. For given monetary policy, a high proportion of fixed‐rate mortgages is welfare enhancing.