Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324369 
Year of Publication: 
2025
Series/Report no.: 
IZA Discussion Papers No. 17971
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
This paper examines the impact of mortgage market structures on shaping economic responses to the unprecedented interest rate and inflation dynamics of 2021-2024. We first empirically document that economies with a larger share of variable-rate mortgages exhibit stronger responses in house prices to monetary policy shocks. We then develop and calibrate a structural model of the housing market to demonstrate that these mortgage structures can account for a substantial portion of the divergent house price paths observed across the US, Canada, Sweden, and the UK during the Great Inflation. Our analysis reveals that early pandemic mortgage rate cuts drove 45% of the US house price boom. Economies dominated by adjustable-rate mortgages (ARMs) show greater price sensitivity to monetary tightening, while fixed-rate mortgage (FRM) regimes exhibit more pronounced path dependence due to a lock-in effect. These dynamics have significant distributional consequences, with low-income homeowners benefiting most, especially in FRM regimes. Finally, we show that the preferred monetary tightening path is regime-dependent, as a policy counterfactual reveals that FRM-dominant economies benefit more from a shorter and sharper tightening schedule.
Subjects: 
heterogeneous agents
monetary policy
mortgages
housing
inflation
JEL: 
D31
E21
E52
Document Type: 
Working Paper

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