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

Fatih Altunok, Yavuz Arslan and Steven Ongena

No 18293, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: While higher interest rates increase the payments for borrowers with adjustable-rate mortgages (ARMs) cutting their disposable income, higher rates also increase lenders’ interest income strengthening their balance sheets. We find correspondingly that —when monetary conditions tighten — banks with higher ARM shares see their stock prices increase, supply more credit, and obtain higher interest income compared to banks with lower ARM shares. Therefore, more ARM credit outstanding may weaken monetary policy transmission. And during a financial crisis when interest income becomes critical for banks, reductions in interest rates may be challenging for those banks with very high ARM shares.

Keywords: Monetary; policy (search for similar items in EconPapers)
JEL-codes: E50 (search for similar items in EconPapers)
Date: 2023-07
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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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