The Transmission of an Interest Rate Shock, Standard Mitigants and Household Behavior

45 Pages Posted: 19 Dec 2018

See all articles by Mauro Mastrogiacomo

Mauro Mastrogiacomo

De Nederlansdche Bank (DNB); Vrije Universiteit Amsterdam, School of Business and Economics

Date Written: December 7, 2018

Abstract

We analyze the transmission of an interest rate shock to households in the context of a stress-test module. We examin standard mitigants, such as delays due to a future interest-rate-reset-date, tax deduction of the interest paid on mortgages, the amortization of different mortgage types and conjunctural factors. We also include the possibility of behavioral responses, where households can alleviate the effect of a shock by reducing debt using voluntary repayments. We estimate a Cragg log-normal hurdle model on loan-level data for the Dutch mortgage market. We simulate debt 30 years into the future under different scenarios for the development of the interest rate and simulating both contractual and voluntary amortization. This study finds a significant dampening role of voluntary repayments on the effects of an interest rate shock.

Keywords: transmission of interest rate shock, voluntary repayments, loan level data

JEL Classification: C01, C23, D14, E44, G21

Suggested Citation

Mastrogiacomo, Mauro, The Transmission of an Interest Rate Shock, Standard Mitigants and Household Behavior (December 7, 2018). De Nederlandsche Bank Working Paper No. 615, Available at SSRN: https://ssrn.com/abstract=3303766 or http://dx.doi.org/10.2139/ssrn.3303766

Mauro Mastrogiacomo (Contact Author)

De Nederlansdche Bank (DNB) ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31(0)20 444 6037 (Phone)
+31(0)20 444 6004 (Fax)

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