Nominal Rigidities in Debt and Product Markets

Abstract

Standard models used for monetary policy analysis rely on sticky prices. Recently, the literature started to explore also nominal debt contracts. Focusing on mortgages, this paper compares the two channels of transmission within a common framework. The sticky price channel is dominant when shocks to the policy interest rate are temporary, the mortgage channel is important when the shocks are persistent. The first channel has significant aggregate effects but small redistributive effects. The opposite holds for the second channel. Using yield curve data decomposed into temporary and persistent components, the redistributive and aggregate consequences are found to be quantitatively comparable. JEL Classification Codes: E32, E52, G21, R21.

Mortgage Design in an Equilibrium Model of the Housing Market

“…Relatedly, a set of papers have argued that adjustablerate mortgages allow for stronger transmission of monetary policy since rate changes directly affect household balance sheets (Calza et al, 2013;Auclert, 2019;Cloyne et al, 2019). Garriga et al (2016) provide a model with long-term debt that features a yield curve and is related to our findings about the differential effects of mortgage designs that are priced off the short end relative to the long end of the yield curve. Di Maggio et al (2017) show empirically that the pass-through of monetary policy to consumption is stronger in regions with more adjustable rate mortgages.…”

Mortgage Design in an Equilibrium Model of the Housing Market

“…Relatedly, several papers argue that ARMs allow for stronger transmission of monetary policy since rate changes directly affect household balance sheets (Calza, Stracca, and Monacelli (2013), Auclert (2019), Cloyne, Ferreira, and Surico (2019)). Garriga, Kydland, and Sustek (2016) provide a model with long-term debt that features a yield curve and is related to our findings about the differential effects of mortgage designs that are priced off the short end relative to the long end of the yield curve. Di Maggio et al (2017) show empirically that the pass-through of monetary policy to consumption is stronger in regions with more ARMs.…”