Housing Prices, Inflation and Business Cycles - Matteo Iacoviello - Fourth Wharton Conference on Liquidity and Financial Crises - October 9, 2015

Sep 4, 2026

A study analyzes monetary policy transmission in a housing model where mortgage-related nominal rigidities persist for 30 years. With inflation-target shifts, policy works through a price (tilt/frontloading) channel and a wealth effect channel. Higher inflation increases current real mortgage payments for ARM borrowers, reducing wealth, consumption, and raising labor hours and GDP. For FRM borrowers, the wealth effect dominates: higher inflation lowers real payments, increases disposable income, slightly lifts consumption, slightly reduces hours, and lowers GDP. Results stress redistribution under market incompleteness.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages35

Reading Time1 h 28 min

AccessFree to download

Summary

Summary of the Paper

Main Findings of the Paper

Central Element of Transmission and Main Findings

Responses to 1 percentage point rise in inflation

Discussion

Beauty

Truth

Conclusions

Summary Beauty Truth about Housing Prices Truth about Ináation and Business Cycles Conclusions Discussion of Garriga, Kydland and Sustek ìMortgages and Monetary Policyî Matteo Iacoviello Federal Reserve Board Fourth Wharton Conference on Liquidity and Financial Crises October 9, 2015 The views expressed in this paper are solely the responsibility of the author and should not be interpreted as reáecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. Summary Beauty Truth about Housing Prices Truth about Ináation and Business Cycles Conclusions Summary of the Paper 1. This paper studies monetary policy transmission in a housing model with prices that are Öxed for 30 years 2. In certain circles, assuming nominal rigidities of this size is considered a major crime 3. Interesting spin: the nominal rigidity here applies to mortgage payments 4. Unlike price rigidity, this is a rigidity that is harder to question, and needs no fairy to be justiÖed Summary Beauty Truth about Housing Prices Truth about Ináation and Business Cycles Conclusions Main Findings of the Paper Monetary policy characterized by shifts in the ináation target. Two channels of monetary policy transmission: 1. Price channel (tilt/frontloading e§ect): higher ináation increase current real payments relative to future real payments ñ> hurts borrowers, even if it is neutral for investors 2. Wealth e§ect channel: higher ináation reduces current and expected future real payments on outstanding mortgage debt and thus increases disposable income. 􀀏 ARM: high ináation, higher interest rates, higher real payments (price channel dominates) 􀀏 FRM: high ináation, lower real payments (wealth channel dominates) Summary Beauty Truth about Housing Prices Truth about Ináation and Business Cycles Conclusions Central Element of Transmission and Main Findings Responses to 1 percentage point rise in ináation Summary Beauty Truth about Housing Prices Truth about Ináation and Business Cycles Conclusions Central Element of Transmission and Main Findings 􀀏 Monetary Policy Redistributes Wealth under Market Incompleteness (Figure 4 in the paper) 􀀏 ARM: High Ináation ñ> Higher Debt Payments on Impacts ñ> BorrowersíWealth Drops ñ> BorrowersíConsumption Drops ñ> BorrowersíHours Increase ñ> GDP up (relatively by a lot) 􀀏 FRM: High Ináation ñ> Lower Debt Payments on Impacts ñ> BorrowersíWealth Increases ñ> BorrowersíConsumption mildly rises ñ> BorrowersíHours slightly fall ñ> GDP down (relatively by little) Summary Beauty Truth about Housing Prices Truth about Ináation and Business Cycles Conclusions Discussion 􀀏 My discussion will focus on two main issues Summary Beauty Truth about Housing Prices Truth about Ináation and Business Cycles Conclusions Discussion 􀀏 My discussion will focus on two main issues 􀀏 (1) Beauty Summary Beauty Truth about Housing Prices Truth about Ináation and Business Cycles Conclusions Discussion 􀀏 My discussion will focus on two main issues 􀀏 (1) Beauty 􀀏 (2) Truth Summary Beauty Truth about Housing Prices Truth about Ináation and Business Cycles Conclusions Beauty 􀀏 The channel and mechanisms by which surprises in ináation redistribute wealth is a classic. A partial and incomplete list includes: Algan-Ragot, Auclert, Bernanke, Brunnermeier-Salnikov, Camera-Chien, Doepke-Schneider, Fischer-Modigliani, Fisher, Gornemann-Kuester-Nakajima, Meh-RiosRull-Terajima, myself, Sheedy, Sterk-Tenreyro, Tobin GKS give proper and ample credit to many of them... 􀀏 What is new (and brilliant) in this paper is: 􀀏 the illustration of the key channels 􀀏 the quantitative application to one of the key markets where unanticipated ináation matters, both in the simple 2-period model and in the inÖniteñhorizon version Summary Beauty Truth about Housing Prices Truth about Ináation and Business Cycles Conclusion

FAQs

What does the paper study about monetary policy transmission?

It studies monetary policy transmission in a housing model where housing prices are fixed for 30 years, focusing on how inflation-target shifts affect borrowers through mortgage-payment rigidity.

What are the two channels of transmission highlighted in the paper?

The paper identifies a price channel (tilt/frontloading effect) and a wealth effect channel, with higher inflation shifting real mortgage payments and disposable income.

How do ARM and FRM borrowers respond differently to a 1 percentage point rise in inflation?

For ARM, higher inflation raises real debt payments on impact, causing borrowers’ wealth and consumption to drop while hours and GDP rise. For FRM, higher inflation lowers real payments, increasing wealth and disposable income, producing a mild consumption rise, slight hours fall, and a GDP decline (by relatively little).

What is the novelty emphasized under the “Beauty” discussion?

The discussion credits the paper for illustrating key transmission channels and applying them quantitatively to a key market where unanticipated inflation matters, both in a simple two-period model and an infinite-horizon version.

Sep 4, 2026

Uploaded by Emma Wilson