The Cash-Flow Channel of Monetary Policy: Evidence from Mortgage Borrowers

52 Pages Posted: 31 Jul 2019

See all articles by Sang-yoon Song

Sang-yoon Song

Bank of Korea - Economic Research Institute

Date Written: July 29, 2019


This paper investigates the relationships between consumption and mortgage interest reduction caused by an expansionary monetary policy, using comprehensive borrower-level information on mortgages and credit card purchases from a credit bureau company in South Korea. The main findings are as follows: (i) the significant and negative relationship between mortgagors’ interest payments and consumption comes from borrowers with ARMs (Adjustable-Rate Mortgages), (ii) among mortgagors with ARMs, those with low liquidity and credit accessibility show a high interest-induced MPC (Marginal Propensity to Consume), (iii) the debt burdens of mortgagors have a weaker effect on the interest-induced MPC heterogeneity due to active deleveraging behavior of borrowers with a high debt burden, (iv) while unconstrained borrowers consistently show low and insignificant MPCs, constrained borrowers (those with low liquidity, credit accessibility) maintain long-lasting high MPCs for eight quarters after interest reduction, and (v) the MPC of those with low liquidity becomes lower as time goes by, indicating that windfall gains by mortgage interest reduction help to relax the liquidity constraints they face. These results imply that financial characteristics of mortgage borrowers can affect the magnitude and persistence of the cash flow channels of an expansionary monetary policy.

Keywords: Mortgage, Consumption, Monetary Policy, Household Debt

JEL Classification: D14, E21, E52

Suggested Citation

Song, Sang-yoon, The Cash-Flow Channel of Monetary Policy: Evidence from Mortgage Borrowers (July 29, 2019). Bank of Korea WP 2019-20. Available at SSRN: or

Sang-yoon Song (Contact Author)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

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