This article compares the effects of the standard fixed-payment mortgage
instrument (SMI) and the graduated-payment mortgage instrument on an
individual's housing decisions in an inflationary environment. Using a
simulation model of life-cycle consumer choice, the results with the SMI
suggest that low to moderate rates of inflation increase housing demand but
rates in excess of 10% have the opposite effect. The results also suggest that the
GPM has the potential to increase substantially housing demand, with
households willing to pay moderate premiums in order to obtain GPMs.
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