Housing Collateral and the Monetary Transmission Mechanism

In this paper, we quantify the effects of the recent increase in the housing loan-to-value ratio (LTV) on the monetary transmission mechanism. We set up a two-sector dynamic stochastic general equilibrium model with collateral constraints and production of goods and housing. Using Bayesian methods, we quantify the component of the monetary transmission mechanism that is generated by housing collateral. We find that this component is substantial and strongly increasing in the LTV. We conclude that in order to properly understand the monetary transmission mechanism, we need to take into account the effects of housing-related collateral constraints and their changing nature.