IFS Seminar presented by Fergus Cumming (Bank of England)

Abstract: This seminar examines whether monetary policy pass-through to mortgage rates affects household fertility decisions and spending in the local economy. Using administrative data on UK mortgages, births and employment, our empirical strategy exploits variation in the timing of when families were eligible for a rate adjustment, coupled with the large reductions in interest rates that occurred during the Great Recession. We estimate that each 1 percentage point drop in Bank Rate increased birth rates by 2 percent. Furthermore, a reduction in mortgage payments of £1,000 per household led to a 0.3 percentage point increase in locally non-tradable employment growth over three years, with the most pronounced effects in the restaurant sector. Our results provide new evidence on the nature of monetary policy transmission and suggest a new mechanism via which mortgage contract structures can affect aggregate demand and supply.