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How does monetary policy pass-through affect mortgage default? Evidence from the Irish mortgage market

David Byrne (), Robert Kelly and Conor O'Toole ()

No 04/RT/17, Research Technical Papers from Central Bank of Ireland

Abstract: One channel through which monetary policy can affect loan default in the mortgage market is by altering the affordability of borrower repayments. Quantifying the exact impact of this relationship is complex as it depends on both the structure and passthrough of a given mortgage market. This paper uses a quasi-natural experiment to identify the impact of changes in interest rates on mortgage default. Using a panel of loan level administrative data for Ireland, we deal with selection bias that is inherent in identifying the impact of interest rates by exploiting the variation between two types of adjustable rate mortgage that were offered to Irish borrowers for a particular period in the mid-2000s. We map changes in interest rates to default by quantifying the direct effect through changes in borrower installments. Using a pass-through approach, we find a strong and highly statistically significant impact of interest rates on mortgage default, with a 1 per cent reduction in installment associated with a 5.8 per cent decrease in the likelihood of default over the following year. We also find evidence that negative equity offsets the some of the gains arising from lower policy rates indicating an interaction between monetary policy and asset price shocks in the mortgage market.

Keywords: Monetary Policy; Mortgage Default (search for similar items in EconPapers)
JEL-codes: E52 E58 G01 G21 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eur, nep-mac, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
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