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

Author

Listed:
  • Fatih Altunok
  • Yavuz Arslan
  • Steven Ongena

Abstract

While a higher monetary policy rate increases the payments for borrowers with adjustable-rate mortgages (ARMs) and reduces their disposable income, it increases the interest income of lenders, thereby improving lenders’ balance sheets. We find that when monetary policy tightens, banks with a higher share of ARMs experience better stock price performance, exhibit a stronger credit supply, and generate higher interest income compared to banks with a low ARM share. Therefore, our results imply that a higher ARM share might weaken monetary policy transmission through banks. In the event of a banking crisis, for instance, when interest income becomes vital, a decline in policy rates might even prove harmful if the ARM share is high.

Suggested Citation

  • Fatih Altunok & Yavuz Arslan & Steven Ongena, 2023. "Monetary Policy Transmission with Adjustable and Fixed Rate Mortgages: The Role of Credit Supply," Working Papers 202305, University of Liverpool, Department of Economics.
    • Handle: RePEc:liv:livedp:202305
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    File URL: https://www.liverpool.ac.uk/media/livacuk/schoolofmanagement/docs/ECON,WP,202305.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary policy; Adjustable rate mortgages; Fixed rate mortgages;
    All these keywords.

    JEL classification:

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

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