Monetary Policy Transmission with Adjustable and Fixed Rate Mortgages: The Role of Credit Supply

Fatih Altunok, Yavuz Arslan and Steven Ongena

No 202305, Working Papers from University of Liverpool, Department of Economics

Abstract: While a higher monetary policy rate increases the payments for borrowers with adjustable-rate mortgages (ARMs) and reduces their disposable income, it increases the interest income of lenders, thereby improving lenders’ balance sheets. We find that when monetary policy tightens, banks with a higher share of ARMs experience better stock price performance, exhibit a stronger credit supply, and generate higher interest income compared to banks with a low ARM share. Therefore, our results imply that a higher ARM share might weaken monetary policy transmission through banks. In the event of a banking crisis, for instance, when interest income becomes vital, a decline in policy rates might even prove harmful if the ARM share is high.

Keywords: Monetary policy; Adjustable rate mortgages; Fixed rate mortgages (search for similar items in EconPapers)
JEL-codes: E50 E52 E58 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2023-07
New Economics Papers: this item is included in nep-cba and nep-mon
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Forthcoming

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https://www.liverpool.ac.uk/media/livacuk/schoolof ... s/ECON,WP,202305.pdf First version, 2023 (application/pdf)

Related works:
Working Paper: Monetary Policy Transmission with Adjustable and Fixed-Rate Mortgages: The Role of Credit Supply (2024)
Working Paper: Monetary Policy Transmission with Adjustable and Fixed Rate Mortgages: The Role of Credit Supply (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:liv:livedp:202305

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