Quantitative easing and the loan to collateral value ratio

Damjanovic, T.; Girdėnas, Š

doi:10.1016/j.jedc.2014.05.013

Quantitative easing and the loan to collateral value ratio

Damjanovic, T.; Girdėnas, Š

Authors

Professor Tatiana Damjanovic tatiana.damjanovic@durham.ac.uk
Professor

Š Girdėnas

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
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

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Copyright Statement
NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Economic Dynamics and Control. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Economic Dynamics and Control, 45, August 2014, 10.1016/j.jedc.2014.05.013.