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Monetary and macroprudential policies under fixed and variable interest rates

Rubio, Margarita

Authors



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 Mar 29, 2024
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

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