The Interest Rate Exposure of Euro Area Households

40 Pages Posted: 25 Feb 2019 Last revised: 18 Nov 2021

Date Written: 2019

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)

JEL Classification: D31, E21, E52, E58

Suggested Citation

Tzamourani, Panagiota, The Interest Rate Exposure of Euro Area Households (2019). Available at SSRN: https://ssrn.com/abstract=3331454 or http://dx.doi.org/10.2139/ssrn.3331454

Panagiota Tzamourani (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
38
Abstract Views
390
PlumX Metrics