The interest rate exposure of euro area households

No 01/2019, Discussion Papers from Deutsche Bundesbank

Abstract: We estimate the "unhedged interest rate exposure" (URE) of euro area households. The URE is a welfare metric that captures the extent to which households are exposed to changes in real interest rates, and reflects the direct gains and losses in interest income flows incurred by households after such a change. It is defined as the difference between maturing assets and maturing liabilities at a given point in time (Auclert 2019). We examine the distribution of the UREs along the net wealth, income, age and housing status distributions for the euro area as a whole and for individual countries, and document substantial heterogeneity across these dimensions. The median household in the euro area has a positive interest rate exposure, indicating that it would gain, in the first instance, from an increase in the interest rate, all other things remaining constant. Households in the lower end of the net wealth and income distribution, younger households and mortgagors, have negative interest rate exposure and would lose from an increase in interest rates. The heterogeneity across countries is largely attributed to the differences in the prevalence of adjustable rate mortgages (ARMs). Countries with a high prevalence of ARMs have interest rate exposure distributions skewed to the left, with negative mean interest rate exposure. Interest gains/losses after a monetary policy shock can be substantial for households with negative interest rate exposure, particularly for mortgagors, and of a similar (absolute) magnitude to capital gains/losses from associated changes in house prices. Besides the direct distributional consequences and the implications for monetary policy, the distribution of the interest rate exposures may help explain the general public's views with the respect to the prevailing monetary policy regime or the central bank.

Keywords: interest rate exposure; URE; monetary policy; distributional effects; adjustable rate mortgage (ARM); Household Finance and Consumption Survey (HFCS) (search for similar items in EconPapers)
JEL-codes: D31 E21 E52 E58 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/191798/1/1048351416.pdf (application/pdf)

Related works:
Journal Article: The interest rate exposure of euro area households (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:012019

Access Statistics for this paper

More papers in Discussion Papers from Deutsche Bundesbank Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().