Monetary Policy, Mortgages and Consumption: Evidence from Italy

Using the 2008-2014 Italian Survey of Household Income and Wealth (SHIW), we study whether the drop in interest rates following the Great Recession was associated with a reduction in mortgage payments for households with Adjustable Rate Mortgages (ARM) relative to those with Fixed Rate Mortgages (FRM). Preliminary results indicate that after the shock, consumption of ARM holders increases relative to FRM but the implied marginal propensity to consume (MPC) is not statistically different from zero. We suggest two explanations for the weak consumption response to the income shock. First, most mortgagors believed that the income shock was transitory, and that interest rates would likely increase in the future, implying a small effect on consumption. Second, the shock is offset partly by a reduction in income from financial assets owned by mortgagors. The paper has implications for the conduct of monetary policy interventions and the credibility of the future path of interest rates, pass-through of monetary policy through household balance sheets, and design of the mortgage market.