The Interest Rate Exposure of Euro Area Households

Abstract

We estimate the "Unhedged Interest Rate Exposure" (URE) of euro area households. URE is the difference between maturing assets and maturing liabilities at a point in time. It captures the extent to which households are exposed to changes in the interest rates and translates into the direct gains or losses in interest income flows incurred by households after such a change. 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 the interest rates. The heterogeneity across countries is largely attributed to the differences in the prevalence of adjustable rate mortgages (ARMs). Countries with 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 comparable (absolute) magnitude to capital gains/losses from associated changes in house prices.

Besides the direct distributional consequences and the implications to monetary policy, the distribution of the interest rate exposures may help explain the public's views with respect to the prevailing monetary policy regime or the central bank.

Keywords: Interest rate exposure, URE, redistribution, adjustable rate mortgage (ARM), Household Finance and Consumption Survey (HFCS), monetary policy

JEL Classification: D31, E21, E52, E58