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The Mortgage Debt Channel of Monetary Policy when Mortgages are Liquid

Author

Listed:
  • Matthew Elias
  • Christian Gillitzer
  • Greg Kaplan
  • Gianni La Cava
  • Nalini V. Prasad

Abstract

We examine what is widely considered to be one of the strongest channels of monetary policy transmission into household spending – the effect of changes in mortgage payments when mortgage rates are linked to the short-term policy rate. Using bank transactions data from Australia, we analyze a cumulative 425 basis point increase in the central bank policy rate, which caused mortgage repayments for homeowners with adjustable-rate mortgages to increase by $13,800. We find little change in the spending of adjustable-rate mortgagors relative to fixed rate mortgagors. This is because adjustable-rate mortgages come with redraw facilities that make mortgages liquid, and households had large excess buffers due to pandemic-era transfer programs and restrictions on spending. Our findings demonstrate that the direct effects of a monetary policy tightening on household spending need not be large.

Suggested Citation

  • Matthew Elias & Christian Gillitzer & Greg Kaplan & Gianni La Cava & Nalini V. Prasad, 2025. "The Mortgage Debt Channel of Monetary Policy when Mortgages are Liquid," NBER Working Papers 34461, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34461
    Note: EFG IFM ME
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    JEL classification:

    • D0 - Microeconomics - - General
    • E0 - Macroeconomics and Monetary Economics - - General

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