Long-Term Debt and Short-Term Rates: Fixed-Rate Mortgages and Monetary Transmission

IMF Working Papers, January 24, 2025

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Canonical URL: Long-Term Debt and Short-Term Rates: Fixed-Rate Mortgages and Monetary Transmission

Research question: two-way relationship between fixed-rate mortgages (FRMs) and monetary policy.
Scope: panel of up to 35 countries over the last two decades.
Data frequency: quarterly information on the composition of mortgage flows and stock by type of rate-fixation and monetary policy shocks cleaned of information effects.
Estimation approach: instrumental-variable local projections.
Core findings summarized: both path- and state-dependency in monetary transmission; monetary policy influences mortgage choice, and mortgage composition feeds back into monetary transmission effectiveness.

Monetary policy shapes mortgage choice: monetary easing increases the share of FRMs; monetary tightening decreases the share of FRMs (stated as "increasing (decreasing) the share of FRMs during easing (tightening) cycles").
Over time, mortgage-choice responses alter the composition of the outstanding mortgage stock.
The altered mortgage stock composition affects central banks’ ability to stabilize the economy ex-post.
Directional effect on transmission: a greater prevalence of FRMs weakens monetary policy transmission to key macro-variables; a lower prevalence of FRMs strengthens monetary policy transmission to key macro-variables.
Evidence indicates both path-dependency (the history of policy changes matters) and state-dependency (effects differ across economic states) in transmission.

Monetary policy has distributional and balance-sheet consequences through its influence on mortgage contract choice.
Central banks’ effectiveness in stabilizing macro-variables depends on the share of FRMs in the mortgage stock: higher FRM prevalence reduces pass-through from short-term policy rates to macro-variables.
Policy design and communication should account for the feedback loop between policy actions and mortgage market composition, recognizing that repeated easing/tightening cycles can cumulatively change transmission dynamics.
Monitoring mortgage contract composition (flows and stock by type of rate-fixation) is important for assessing the evolving potency of monetary policy.

Panel: up to 35 countries.
Time span: last two decades.
Frequency: quarterly.
Variables: composition of mortgage flows and stock by type of rate-fixation; monetary policy shocks cleaned of information effects.
Methodology: instrumental-variable local projections.
Subject tags provided: Central bank policy rate, Financial institutions, Financial services, Housing prices, Mortgages, National accounts, Prices, Private consumption, Stocks.
Keywords provided: ARM rate, Central bank policy rate, Global, Housing prices, Monetary Policy, monetary policy shock, monetary policy transmission, mortgage choice, Mortgage Markets, Mortgages, prevalence of FRMs, Private consumption, Stocks.