Monk: Mortgages in a New-Keynesian Model

Abstract

We propose a tractable framework for monetary policy analysis in which both short - and long-term debt affect equilibrium outcomes. This objective is motivated by observations from two literatures suggesting that monetary policy contains a dimension affecting expected future interest rates and thus the costs of long-term financing. In New-Keynesian models, however, long-term loans are redundant assets. We use the model to address three questions: what are the effects of statement vs. action policy shocks; how important are standard New-Keynesian vs. cash flow effects in their transmission; and what is the interaction between these two effects?