Quantitative easing and the loan to collateral value ratio
Damjanovic, Tatiana; Girdenas, Sarunas
Date: 5 June 2014
Article
Journal
Journal of Economic Dynamics and Control
Publisher
Elsevier
Publisher DOI
Abstract
We study monetary optimal policy in a New Keynesian model at the zero bound
interest rate where households use cash alongside house equity borrowing to conduct
transactions. The amount of borrowing is limited by a collateral constraint. When either
the loan to value ratio declines or house prices fall, we observe a decrease in the ...
We study monetary optimal policy in a New Keynesian model at the zero bound
interest rate where households use cash alongside house equity borrowing to conduct
transactions. The amount of borrowing is limited by a collateral constraint. When either
the loan to value ratio declines or house prices fall, we observe a decrease in the money
multiplier. We argue that the central bank should respond to the fall in the money
multiplier and therefore to the reduction in house prices or the loan to collateral value
ratio. We also find that optimal monetary policy generates a large and persistent fall in
the money multiplier in response to the drop in the loan to collateral value ratio.
Economics
Faculty of Environment, Science and Economy
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