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

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  • Altunok, Fatih
  • Arslan, Yavuz
  • Ongena, Steven

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.

Suggested Citation

  • Altunok, Fatih & Arslan, Yavuz & Ongena, Steven, 2023. "Monetary Policy Transmission with Adjustable and Fixed Rate Mortgages: The Role of Credit Supply," CEPR Discussion Papers 18293, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18293
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    More about this item

    Keywords

    Monetary policy;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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