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The Mortgage Cash Flow Channel of Monetary Policy Transmission: A Tale of Two Countries

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Abstract

We study the mortgage cash flow channel of monetary policy transmission under fixed-rate mortgage (FRM) versus adjustable-rate mortgage (ARM) regimes by comparing the United States with primarily long-term FRMs and Spain with primarily ARMs that automatically reset annually. We find a robust transmission of mortgage rate changes to spending in both countries but surprisingly a larger effect in the United States—and provide two explanations for this finding. First, there are channels of transmission other than the mortgage cash flow effect since other interest rates co-move with the mortgage rate. Second, while mortgage resets in Spain are automatic and typically small, mortgagors in the United States must actively refinance to lock in lower rates. As a result, the mortgage cash flow effect in Spain is homogeneous across mortgagors and symmetric for rate increases and decreases, whereas in the United States the effect is largest when rates decline, especially for households identified as likely refinancers.

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  • Daniel H. Cooper & Vaishali Garga & María Jose Luengo-Prado, 2021. "The Mortgage Cash Flow Channel of Monetary Policy Transmission: A Tale of Two Countries," Working Papers 21-8, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:93056
    DOI: 10.29412/res.wp.2021.08
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    References listed on IDEAS

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    1. Helen Hughson & Gianni La Cava & Paul Ryan & Penelope Smith, 2016. "The Household Cash Flow Channel of Monetary Policy," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 21-30, September.
    2. Martin Eichenbaum & Sergio Rebelo & Arlene Wong, 2022. "State-Dependent Effects of Monetary Policy: The Refinancing Channel," American Economic Review, American Economic Association, vol. 112(3), pages 721-761, March.
    3. James Cloyne & Clodomiro Ferreira & Paolo Surico, 2020. "Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(1), pages 102-129.
    4. Slacalek, Jiri & Tristani, Oreste & Violante, Giovanni L., 2020. "Household balance sheet channels of monetary policy: A back of the envelope calculation for the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).
    5. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    6. Marco Di Maggio & Amir Kermani & Benjamin J. Keys & Tomasz Piskorski & Rodney Ramcharan & Amit Seru & Vincent Yao, 2017. "Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging," American Economic Review, American Economic Association, vol. 107(11), pages 3550-3588, November.
    7. Karen Dynan, 2012. "Is a Household Debt Overhang Holding Back Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 299-362.
    8. Karen Dynan, 2012. "Is a Household Debt Overhang Holding Back Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(1 (Spring), pages 299-362.
    9. Tullio Jappelli & Annalisa Scognamiglio, 2018. "Interest rate changes, mortgages, and consumption: evidence from Italy," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 33(94), pages 183-224.
    10. repec:fip:a00001:92867 is not listed on IDEAS
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    Cited by:

    1. Itamar Caspi & Nadav Eshel & Nimrod Segev, 2024. "The Mortgage Cash-Flow Channel: How Rising Interest Rates Impact Household Consumption," Papers 2410.02445, arXiv.org.

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    More about this item

    Keywords

    consumption; intertemporal household choice; monetary policy transmission; adjustable-rate mortgages; fixed-rate mortgages;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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