We model an economy with long-term mortgages and show that some characteristics of mortgage contracts - such as the type of interest rate (adjustable versus fixed) and the loan-to-value ratio - matter for the transmission of monetary policy impulses, both conventional and unconventional.
A conventional monetary policy shock has a stronger impact on output and inflation with adjustable-rate mortgages, also reflecting the higher sensitivity of installments to changes in the short-term rate.
When households borrow at a fixed rate, unconventional monetary policy can stimulate the economy mainly through a redistribution of income from savers to borrowers, who have a higher marginal propensity to consume. The impact of monetary policy - both conventional and unconventional - is stronger when the level of households' mortgage debt is high relative to housing wealth.
Published in 2020 in: Journal of Macroeconomics, v. 64
