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Fixed- and Variable-Rate Mortgages, Business Cycles, and Monetary Policy


  • Part of this project was developed during my dissertation internships at the St. Louis Fed and the Federal Reserve Board, whose hospitality I gratefully acknowledge. I am highly indebted to Fabio Ghironi, Matteo Iacoviello, and Peter Ireland for their help and advice. Thanks to seminar participants of the Dissertation Workshop at BC, R@BC, University of Valencia, University of Barcelona, WEAI, and three anonymous referees for useful suggestions. And special thanks to Susanto Basu, Bill Dupor, Simon Gilchrist, Michael Kiley, Andreas Lehnert, Antonio Miralles, Ed Nelson, Galo Nuño, and Michael Palumbo. All errors are mine. This paper was previously circulated under the name “Fixed and Variable-Rate Mortgages and the Monetary Transmission Mechanism.” Usual disclaimer applies.


This paper studies how the proportion of fixed- and variable-rate mortgages affects business cycles and welfare. I develop and solve a New Keynesian dynamic stochastic general equilibrium model with a housing market and a group of constrained individuals who need housing collateral to obtain loans. The model predicts that with mostly variable-rate mortgages, an exogenous interest rate shock has larger effects on borrowers than in a fixed-rate economy. For plausible parameterizations, aggregate differences are muted by wealth effects on labor supply and by the presence of savers. For given monetary policy, a high proportion of fixed-rate mortgages is welfare enhancing.

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