Innovations in Mortgage Finance and the Onset of the Great Recession in a Small Open Economy with a Euro Peg

Thomas Barnebeck Andersen, Nikolaj Malchow-Møller

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

The Global Financial Crisis (GFC) of 2008 hit Denmark particularly hard. In this paper we argue that a combination of innovation in mortgage finance and the need to defend a euro-exchange rate peg was partly responsible. Sustained pressure against the Danish krone forced the central bank to increase policy interest rates consecutively in the last quarter of 2008. Monetary tightening in the midst of the GFC deepened the ongoing recession for the usual Keynesian aggregate demand reasons. Innovations in mortgage finance, which had made the economy more sensitive to changes in the policy rate, exacerbated this effect.

Original languageEnglish
JournalComparative Economic Studies
Volume57
Issue numberDecember
Pages (from-to)711-734
ISSN0888-7233
DOIs
Publication statusPublished - 1. Dec 2015

Keywords

  • adjustable-rate mortgages
  • currency peg
  • financial innovation
  • global financial crisis
  • great recession

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