The Mortgage Cash Flow Channel of Monetary Policy Transmission: A Tale of Two Countries

We study the mortgage cash flow channel of monetary policy transmission under fixed-rate mortgage (FRM) versus adjustable-rate mortgage (ARM) regimes by comparing the United States with primarily long-term FRMs and Spain with primarily ARMs that automatically reset annually. We find a robust transmission of mortgage rate changes to spending in both countries but surprisingly a larger effect in the United States—and provide two explanations for this finding. First, there are channels of transmission other than the mortgage cash flow effect since other interest rates co-move with the mortgage rate. Second, while mortgage resets in Spain are automatic and typically small, mortgagors in the United States must actively refinance to lock in lower rates. As a result, the mortgage cash flow effect in Spain is homogeneous across mortgagors and symmetric for rate increases and decreases, whereas in the United States the effect is largest when rates decline, especially for households identified as likely refinancers.