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Cost-push shocks and monetary policy transmission under the existence of fixed rate mortgage contracts and high indebtedness

This thesis examines the transmission of monetary policy and the effects of persistent cost-push shocks in the presence of high household indebtedness (DTI) and frictions in fixed-rate mortgage (FRM) interest rates. A dynamic stochastic general equilibrium (DSGE) model incorporating housing, household debt, and long-term FRMs is estimated to accomplish this. The key findings can be summarized as follows: (i) A higher DTI leads to a stronger transmission of monetary policy, although this effect is dampened by the degree of interest rate fixation periods. (ii) Cost-push shocks propagates more strongly to inflation when the interest rate fixation periods is longer, resulting in delayed and slightly muted effects on output and consumption compared to adjustable-rate mortgages (ARM). (iii) While stronger responses to inflation help mitigate the cost-push shock, this comes at the expense of a larger output gap but with a slightly faster stabilization of the economy with a somewhat steeper recovery.

Identiferoai:union.ndltd.org:UPSALLA1/oai:DiVA.org:uu-507334
Date January 2023
CreatorsBackberg, Emma
PublisherUppsala universitet, Nationalekonomiska institutionen
Source SetsDiVA Archive at Upsalla University
LanguageEnglish
Detected LanguageEnglish
TypeStudent thesis, info:eu-repo/semantics/bachelorThesis, text
Formatapplication/pdf
Rightsinfo:eu-repo/semantics/openAccess

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