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The aim of this paper is twofold. First, the author studies how the proportion of fixed and variable-rate mortgages in an economy can affect the way shocks are propagated. Second, the author analyzes optimal implementable simple monetary policy rules and the welfare implications of this proportion. The author develops and solves a New Keynesian dynamics stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given proportion of constrained households borrow at a variable rate, while the rest borrows at a fixed rate. The model predicts that in an economy with mostly variable-rate mortgages, an exogenous interest rate shock has larger effects on borrowers than in a fixed-rate economy.
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