Working Paper: What are the effects of changes in taxation and new types of mortgages on the real economy? - The case of Denmark during the 00's

Working Papers - March 2017 - No. 113

Authors Pedersen, Jesper
Subject Financial sector; Economic activity and employment; Models
Type Working paper
Year 2017
Published 22 March 2017
What are the effects of introducing interest-only, flexible-rate mortgage contracts and a tax-freeze on housing wealth for the real- and financial economy? I study this within a medium-size DSGE-model with housing, banking and financial frictions, and the coexistence of flexible, fixed rate and interest-only mortgage contracts. I find that the introduction and the adaptation of flexible rate and interest-only mortgage contracts together with a freeze of taxation of the housing wealth can explain around 1/3 of the real house price gap in Denmark during the period 2004-06 and 15-40 per cent of the output gap. The household debt-to-GDP would have been almost constant instead of increasing by 20 percentage points. Finally, the analysis points to a more volatile economy after the implementation of the structural changes to the economy.