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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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    2. KÄ rlis Vilerts & Sofia Anyfantaki & KonstantÄ«ns Beņkovskis & Sebastian Bredl & Massimo Giovannini & Florian Matthias Horky & Vanessa Kunzmann & Tibor Lalinský & Athanasios Lampousis & Elizaveta Lu, 2025. "Details matter: loan pricing and transmission of monetary policy in the euro area," Working Papers 345, Bank of Greece.
    3. Ivanova, Nadezhda & Popova, Svetlana & Styrin, Konstantin, 2025. "Bank market power and monetary policy transmission: Evidence from loan-level data," Emerging Markets Review, Elsevier, vol. 66(C).

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    Keywords

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    JEL classification:

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

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