Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154216
Authors: 
Brzoza-Brzezina, Michał
Kolasa, Marcin
Makarski, Krzysztof
Year of Publication: 
2015
Series/Report no.: 
ECB Working Paper 1783
Abstract: 
In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents' welfare. To this end we construct a small open economy model with housing loans denominated in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that FCLs negatively affect the transmission of monetary policy. In contrast, their impact on the effectiveness of macroprudential policy is much weaker but positive. We also demonstrate that FCLs increase welfare when domestic interest rate shocks prevail and decrease it when risk premium (exchange rate) shocks dominate. Under a realistic calibration of the stochastic environment FCLs are welfare reducing. Finally, we show that regulatory policies that correct the share of FCLs may cause a short term slowdown.
Subjects: 
DSGE models with banking sector
foreign currency loans
monetary and macroprudential policy
JEL: 
E32
E44
E58
ISBN: 
978-92-899-1596-0
Document Type: 
Working Paper

Files in This Item:
File
Size
704.44 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.