Housing Collateral and the Monetary Transmission Mechanism


  • Karl Walentin

    1. Sveriges Riksbank, Stockholm, Sweden
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    • I would like to thank two anonymous referees for valuable suggestions. Thanks to Matteo Iacoviello, Magnus Jonsson, and Peter Sellin for major contributions. I am also grateful for useful comments from Malin Adolfson, Mikael Carlsson, Matthieu Darracq Pariès, Daria Finocchiaro, Paolo Giordani, Jesper Hansson, Peter McAdam, Stefano Neri, Mattias Villani, and participants at various presentations. The views expressed in this paper are solely the responsibility of the author and should not be interpreted as reflecting the views of the Executive Board of Sveriges Riksbank.


In this paper, we quantify the effects of the recent increase in the housing loan-to-value ratio (LTV) on the monetary transmission mechanism. We set up a two-sector dynamic stochastic general equilibrium model with collateral constraints and production of goods and housing. Using Bayesian methods, we quantify the component of the monetary transmission mechanism that is generated by housing collateral. We find that this component is substantial and strongly increasing in the LTV. We conclude that in order to properly understand the monetary transmission mechanism, we need to take into account the effects of housing-related collateral constraints and their changing nature.