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

Abstract We study the two‐way relationship between fixed‐rate mortgages (FRMs) and monetary policy in a panel of up to 35 countries observed over the last two decades. The data set includes quarterly information on the composition of mortgage flows and stocks by type of rate‐fixation and monetary policy shocks cleaned of information effects. Using instrumental‐variable local projections, we show that FRMs induce both path‐ and state‐dependency in monetary transmission. Changes in policy rates shape mortgage choice, increasing (decreasing) the share of FRMs during easing (tightening) cycles. Over time, this mechanism alters the composition of the outstanding mortgage stock which, in turn, affects the central bank's ability to stabilize the economy ex‐post . A greater (lower) prevalence of FRMs weakens (strengthens) monetary policy transmission to real private consumption and GDP.