Working Paper: CEPR ID: DP18293
Authors: Fatih Altunok; Yavuz Arslan; Steven Ongena
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 balancesheets. We find correspondingly that —when monetary conditions tighten — banks with higher ARM sharessee their stock prices increase, supply more credit, and obtain higher interest income compared to banks withlower ARM shares. Therefore, more ARM credit outstanding may weaken monetary policy transmission. Andduring a financial crisis when interest income becomes critical for banks, reductions in interest rates may bechallenging for those banks with very high ARM shares.
Keywords: Monetary policy; Adjustable rate mortgages; Fixed rate mortgages
JEL Codes: E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ARM shares (L64) | stock price performance (G12) |
| ARM shares (L64) | credit supply (E51) |
| ARM shares (L64) | interest income (G29) |