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Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter?

2007; RELX Group (Netherlands); Linguagem: Inglês

1556-5068

Alessandro Calza, Tommaso Monacelli, Livio Stracca,

Financial Literacy, Pension, Retirement Analysis

We study the role of institutional characteristics of mortgage markets in aecting the strength and timing of the eects of monetary policy shocks on house prices and consumption in a sample of industrialized countries. With frictionless credit markets, those characteristics should in principle be immaterial for the transmission of monetary impulses. We document three facts: (1) there is signi…cant divergence in the structure of mortgage markets across the main industrialized countries; (2) at the business cycle frequency, the correlation between consump- tion and house prices increases with the degree of ‡exibility/development of mortgage markets; (3) the transmission of monetary policy shocks on consumption and house prices is stronger in countries with more ‡exible/developed mortgage markets. We then build a two-sector dynamic general equilibrium model with price stickiness and collateral constraints, where the ability of borrowing is endogenously linked to the nominal value of a durable asset (housing). We study how the response of consumption to monetary policy shocks is aected by alternative values of three key institutional parameters: (i) down-payment rate; (ii) mortgage repayment rate; (iii) interest rate mortgage structure (variable vs. …xed interest rate). In line with our empirical evidence, the sensitivity of consumption to monetary policy shocks increases with lower values of (i) and (ii), and is larger under a variable-rate mortgage structure.