How Does Monetary Policy Pass-Through Affect Mortgage Default? Evidence from the Irish Mortgage Market
December 20, 2021
Journal of Money, Credit and Banking
This paper uses a quasi-natural experiment to identify the impact of interest rates on mortgage default. Using loan-level panel data for Ireland, we deal with selection bias by exploiting the variation between two adjustable-rate mortgages offered in the 2000s. We link interest rates to default directly through borrower installments. We find a strong, statistically significant, impact of interest rates on default; a 1% increase in installment is associated with a 5.8% increase in the likelihood of default. We also find evidence that negative equity amplifies the increase in default risk caused by higher interest rates.