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Monetary and macroprudential policies under fixed and variable interest rates

Rubio, Margarita

Authors

Margarita Rubio Margarita.Rubio@nottingham.ac.uk



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.

Journal Article Type Article
Journal Macroeconomic Dynamics
Print ISSN 1365-1005
Electronic ISSN 1469-8056
Publisher Cambridge University Press (CUP)
Peer Reviewed Peer Reviewed
APA6 Citation Rubio, M. (in press). Monetary and macroprudential policies under fixed and variable interest rates. Macroeconomic Dynamics, doi:10.1017/S136510051700013X
DOI https://doi.org/10.1017/S136510051700013X
Keywords fixed/variable-rate mortgages, monetary policy, macroprudential policy, LTV, housing market, collateral constraint
Publisher URL https://www.cambridge.org/core/journals/macroeconomic-dynamics/article/monetary-and-macroprudential-policies-under-fixed-and-variable-interest-rates/A75153B466F7055A7B962BDCCCB50606
Copyright Statement Copyright information regarding this work can be found at the following address: http://eprints.nottingh.../end_user_agreement.pdf

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://eprints.nottingham.ac.uk/end_user_agreement.pdf





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