The Mortgage Cash-Flow Channel: How Rising Interest Rates Impact Household Consumption

Itamar Caspi (), Nadav Eshel and Nimrod Segev
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Itamar Caspi: Bank of Israel
Nadav Eshel: Bank of Israel
Nimrod Segev: Bank of Israel

No 2024.13, Bank of Israel Working Papers from Bank of Israel

Abstract: This study investigates the impact of increased debt servicing costs on household consumption resulting from monetary policy tightening. It utilizes observational panel microdata on all mortgage holders in Israel and leverages quasi-exogenous variation in exposure to adjustable-rate mortgages (ARMs) due to a regulatory shift. Our analysis indicates that when monetary policy became more restrictive, consumers with a higher ratio of ARMs experienced a more marked reduction in their consumption patterns. This effect is predominantly observed in mid- to lower-income households and those with a higher ratio of mortgage payments to total spending. These findings highlight the substantial role of the mortgage cashflow channel in monetary policy transmission, emphasizing its implications for economic stability and inequality. Keywords: Adjustable-rate Mortgages, monetary policy, cash-flow channel, household consumption, heterogeneity, Israel.

Pages: 54 pages
Date: 2024-09
New Economics Papers: this item is included in nep-mon and nep-ure
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