Scandinavian Working Papers in Economics
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Department of Business and Economics, University of Southern Denmark Discussion Papers of Business and Economics
Department of Business and Economics, University of Southern Denmark

No 5/2015:
Innovations in mortgage finance and the onset of the Great Recession in a small open economy with a euro peg

Thomas Barnebeck Andersen () and Nikolaj Malchow-Møller ()

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.

Keywords: Global Financial Crisis; Great Recession; currency peg; financial innovation; adjustable-rate mortgages; (follow links to similar papers)

JEL-Codes: E20; E30; E40; F33; (follow links to similar papers)

35 pages, March 10, 2015

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