Monetary and macroprudential policies under fixed and variable interest rates
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 an...
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| Format: | Article |
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Cambridge University Press
2017
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| Online Access: | https://eprints.nottingham.ac.uk/40034/ |
| _version_ | 1848795972340023296 |
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| author | Rubio, Margarita |
| author_facet | Rubio, Margarita |
| author_sort | Rubio, Margarita |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | 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. |
| first_indexed | 2025-11-14T19:40:35Z |
| format | Article |
| id | nottingham-40034 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| last_indexed | 2025-11-14T19:40:35Z |
| publishDate | 2017 |
| publisher | Cambridge University Press |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-400342020-05-04T18:51:21Z https://eprints.nottingham.ac.uk/40034/ Monetary and macroprudential policies under fixed and variable interest rates Rubio, Margarita 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. Cambridge University Press 2017-06-22 Article PeerReviewed Rubio, Margarita (2017) Monetary and macroprudential policies under fixed and variable interest rates. Macroeconomic Dynamics . ISSN 1469-8056 fixed/variable-rate mortgages monetary policy macroprudential policy LTV housing market collateral constraint https://www.cambridge.org/core/journals/macroeconomic-dynamics/article/monetary-and-macroprudential-policies-under-fixed-and-variable-interest-rates/A75153B466F7055A7B962BDCCCB50606 doi:10.1017/S136510051700013X doi:10.1017/S136510051700013X |
| spellingShingle | fixed/variable-rate mortgages monetary policy macroprudential policy LTV housing market collateral constraint Rubio, Margarita Monetary and macroprudential policies under fixed and variable interest rates |
| title | Monetary and macroprudential policies under fixed and variable interest rates |
| title_full | Monetary and macroprudential policies under fixed and variable interest rates |
| title_fullStr | Monetary and macroprudential policies under fixed and variable interest rates |
| title_full_unstemmed | Monetary and macroprudential policies under fixed and variable interest rates |
| title_short | Monetary and macroprudential policies under fixed and variable interest rates |
| title_sort | monetary and macroprudential policies under fixed and variable interest rates |
| topic | fixed/variable-rate mortgages monetary policy macroprudential policy LTV housing market collateral constraint |
| url | https://eprints.nottingham.ac.uk/40034/ https://eprints.nottingham.ac.uk/40034/ https://eprints.nottingham.ac.uk/40034/ |