Jesper Pedersen
Danmarks Nationalbank
What are the effects of introducing interest-only, flexiblerate mortgage contracts and a tax freeze on housing wealth for the real and financial economy? I study this within a DSGE model with housing, banking, and financial frictions, and the coexistence of flexible-rate, fixed-rate, and interest-only mortgage contracts. I find that the introduction and the adoption of flexible-rate and interest-only mortgage contracts together with a freeze of taxation of the housing wealth can explain 8 percent of the increase in the real house price in Denmark during the period 2004-06 and 0.75 percentage point of the output gap. The household debt-to-GDP ratio would have been almost constant instead of increasing by 20 percentage points. The analysis points to a more volatile Danish economy after the implementation of the structural changes to the economy.
JEL Code: E17, E32, E62, E65, F41.
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