December 2019 issue contents
What Are the Effects of Changes in Taxation and New Types of Mortgages on the Real Economy? The Case of Denmark during the 2000s

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.

Full article (PDF, 53 pages, 2,025 kb)