Monetary and macroprudential policies under fixed and variable interest rates

Rubio, Margarita

Abstract

In this paper, I analyze the ability of monetary policy to stabilize both the macroeconomy and financial markets under two different scenarios: fixed and variable-rate mortgages. I develop and solve a New Keynesian dynamic stochastic general equilibrium model (DSGE) 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 borrow at a fixed rate. I consider two alternative ways of introducing a macroprudential approach to enhancing financial 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). The results show that when rates are variable, a countercyclical LTV rule performs better in stabilizing financial markets than monetary policy. However, when rates are fixed, even though monetary policy is less effective in stabilizing the macroeconomy, it does a good job in promoting financial stability.

Citation

Rubio, M. (in press). Monetary and macroprudential policies under fixed and variable interest rates. Macroeconomic Dynamics, https://doi.org/10.1017/S136510051700013X

• Journal Article Type: Article
• Acceptance Date: Jan 23, 2017
• Online Publication Date: Jun 22, 2017
• Deposit Date: Jan 24, 2017
• Publicly Available Date: Jun 22, 2017
• Journal: Macroeconomic Dynamics
• Print ISSN: 1365-1005
• Electronic ISSN: 1469-8056
• Publisher: Cambridge University Press
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1017/S136510051700013X
• Keywords: fixed/variable-rate mortgages, monetary policy, macroprudential policy, LTV, housing market, collateral constraint
• Public URL: https://nottingham-repository.worktribe.com/output/867763
• Publisher URL: https://www.cambridge.org/core/journals/macroeconomic-dynamics/article/monetary-and-macroprudential-policies-under-fixed-and-variable-interest-rates/A75153B466F7055A7B962BDCCCB50606
• Contract Date: Jan 24, 2017