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How Does Monetary Policy Pass‐Through Affect Mortgage Default? Evidence from the Irish Mortgage Market

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  • DAVID BYRNE
  • ROBERT KELLY
  • CONOR O'TOOLE

Abstract

This paper uses a quasi‐natural experiment to identify the impact of interest rates on mortgage default. Using loan‐level panel data for Ireland, we deal with selection bias by exploiting the variation between two adjustable‐rate mortgages offered in the 2000s. We link interest rates to default directly through borrower installments. We find a strong, statistically significant, impact of interest rates on default; a 1% increase in installment is associated with a 5.8% increase in the likelihood of default. We also find evidence that negative equity amplifies the increase in default risk caused by higher interest rates.

Suggested Citation

  • David Byrne & Robert Kelly & Conor O'Toole, 2022. "How Does Monetary Policy Pass‐Through Affect Mortgage Default? Evidence from the Irish Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(7), pages 2081-2101, October.
    • Handle: RePEc:wly:jmoncb:v:54:y:2022:i:7:p:2081-2101
    DOI: 10.1111/jmcb.12892
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    Cited by:

    1. Fahy, Mike & McQuinn, Kieran & O’Toole, Conor & Slaymaker, Rachel, 2018. "Exploring the implications of monetary policy normalisation for Irish mortgage arrears," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).
    2. Kelly, Jane & Mazza, Elena, 2019. "Mortgage servicing burdens and LTI caps," Financial Stability Notes 13/FS/19, Central Bank of Ireland.
    3. Yosi Borochov & Boris A. Portnov, 2021. "Estimating Environmentally Adjusted Risks of Mortgage Arrears for Different Socioeconomic Groups of Borrowers," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 595-620.
    4. O’Toole, Conor & Slaymaker, Rachel, 2021. "Repayment capacity, debt service ratios and mortgage default: An exploration in crisis and non-crisis periods," Journal of Banking & Finance, Elsevier, vol. 133(C).
    5. Kelly, Jane & Le Blanc, Julia & Lydon, Reamonn, 2018. "Pockets of risk in European Housing Markets: then and now," Research Technical Papers 12/RT/18, Central Bank of Ireland.
    6. Cumming, Fergus, 2022. "Mortgage cash-flows and employment," European Economic Review, Elsevier, vol. 144(C).
    7. Charles Lilly, 2018. "Outcomes from the 2017 stress test of major banks," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 81, pages 1-18, July.
    8. Slaymaker, Rachel & O'Toole, Conor & McQuinn, Kieran & Fahy, Mike, 2018. "Monetary policy normalisation and mortgage arrears in a recovering economy: The case of the Irish residential market," Papers WP613, Economic and Social Research Institute (ESRI).
    9. McQuinn, Kieran & O’Toole, Conor & Allen-Coghlan, Matthew & Economides, Philip, 2019. "Quarterly Economic Commentary, Spring 2019," Forecasting Report, Economic and Social Research Institute (ESRI), number QEC, June.
    10. Cumming, Fergus, 2018. "Mortgages, cash-flow shocks and local employment," Bank of England working papers 773, Bank of England.
    11. McCann, Fergal, 2017. "Resolving a Non-Performing Loan crisis: The ongoing case of the Irish mortgage market," Research Technical Papers 10/RT/17, Central Bank of Ireland.
    12. Kelly, Jane & Myers, Samantha, 2019. "Fixed-rate mortgages: building resilience or generating risk?," Financial Stability Notes 5/FS/19, Central Bank of Ireland.
    13. George Overton & Barbara Castillo Rico, 2020. "Monetary Policy and Housing Loan Default," EconomiX Working Papers 2020-23, University of Paris Nanterre, EconomiX.
    14. Billio, Monica & Dufour, Alfonso & Segato, Samuele & Varotto, Simone, 2023. "Complexity and the default risk of mortgage-backed securities," Journal of Banking & Finance, Elsevier, vol. 155(C).

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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