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Working Paper

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 make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective and may lead to asymmetric responses to positive and negative monetary shocks.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.


Suggested Citation

Bluwstein, Kristina, Michał Brzoza-Brzezina, Paolo Gelain, and Marcin Kolasa. 2019. “Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation.” Federal Reserve Bank of Cleveland, Working Paper No. 19-10. https://doi.org/10.26509/frbc-wp-201910