The mortgage rate channel of monetary policy transmission: a tale of two countries

Abstract

We study the mortgage rate channel of monetary policy transmission under two different mortgage regimes by analyzing the United States with primarily long-term fixed-rate mortgages (FRMs) and Spain with mainly annually resetting adjustable-rate mortgages (ARMs). We find a robust transmission of mortgage rate changes to spending in both regimes, with marginal propensities to consume ranging between 0.58–0.67 in Spain and 0.27–0.52 in the United States. Under ARMs, transmission is stronger when rate changes are expected to persist, whereas under FRMs, the effect is larger when rate changes are expected to revert. We further document the important role of mortgage type in shaping the variation in transmission across mortgagors—while the mortgage rate effect is fairly homogeneous across diverse household characteristics under ARMs, it is more heterogeneous under FRMs and largest among potential refinancers.