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Quantitative easing and the loan to collateral value ratio.

Damjanovic, T. and Girdėnas, Š. (2014) 'Quantitative easing and the loan to collateral value ratio.', Journal of economic dynamics and control., 45 . pp. 146-164.


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.

Item Type:Article
Keywords:Optimal monetary policy, Zero lower bound, Quantitative easing, Money multiplier, Loan to value ratio, House prices.
Full text:(AM) Accepted Manuscript
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Publisher 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.
Date accepted:21 May 2014
Date deposited:20 April 2015
Date of first online publication:05 June 2014
Date first made open access:05 June 2016

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