Quantitative easing and the loan to collateral value ratio

Damjanovic, T.; Girdėnas, Š

Abstract

We study optimal monetary 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.

Citation

Damjanovic, T., & Girdėnas, Š. (2014). Quantitative easing and the loan to collateral value ratio. Journal of Economic Dynamics and Control, 45, 146-164. https://doi.org/10.1016/j.jedc.2014.05.013

• Journal Article Type: Article
• Acceptance Date: May 21, 2014
• Online Publication Date: Jun 5, 2014
• Publication Date: Aug 1, 2014
• Deposit Date: Apr 15, 2015
• Publicly Available Date: Jun 5, 2016
• Journal: Journal of Economic Dynamics and Control
• Print ISSN: 0165-1889
• Electronic ISSN: 1879-1743
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 45
• Pages: 146-164
• DOI: https://doi.org/10.1016/j.jedc.2014.05.013
• Keywords: Optimal monetary policy, Zero lower bound, Quantitative easing, Money multiplier, Loan to value ratio, House prices.
• Public URL: https://durham-repository.worktribe.com/output/1410073