Monetary policy and its impact on social differences

16 December 2021. The base rate is the interest rate at which commercial banks can borrow money from the national bank. It thus crucially determines the general interest level in a national economy. This level, in turn, determines the interest income from savings deposits, for example, but also the level of the mortgage rate. Now, if a national bank lowers the base rate, different groups of the population will be affected differently with regard to their financial situation and thus potentially also with regard to their consumer behaviour. “Roughly speaking, after a base rate cut, people who have to pay off a mortgage have more money at their disposal for private consumption than people with savings deposits, which now yield less interest,” says Prof. Dr. Winfried Königer of the Swiss Institute for Empirical Economic Research of the HSG (SEW-HSG). Of course, the influences which co-determine consumer behaviour are complex: “Low interest rates might also entice savers to consume more. What decision they make ultimately depends on further influence factors and asset items.” Prof. Dr. Winfried Königer and his fellow researcher Thomas Hintermaier from the University of Bonn have mapped these complex influences on consumer behaviour together with data about the asset structures of private households in France, Germany, Spain and Italy in a model, which enabled the researchers to simulate the impact of unexpected base rate changes on these countries’ private consumption and different population groups.

Different levels of impact on the real estate market

As indicated above, the transference of monetary policy onto overall private consumption in a national economy also depends on how many people own a house and whether changes in the base rate have an immediate effect on their mortgage rates. Therefore Prof. Dr. Winfried Königer, together with Benedikt Lennartz of the SEW-HSG and Marc-Antoine Ramelet of the Swiss National Bank empirically examined in another study how strongly base rate cuts impact on the real estate markets of Germany, Italy and Switzerland. They discovered that in Switzerland, for example, unexpected base rate cuts are more strongly reflected in lower mortgage rates than in the other two countries. As was shown empirically, this also increased the probability that in Switzerland, as opposed to the other countries, tenants would become home owners.

Lower consumption impact in Germany

Concerning consumers’ response, the model revealed that in countries with an asset structure like Spain and Italy, a greater increase in consumption (+0.43% each) could be observed than in France (+0.38%) and Germany (0.34%) one year after a base rate cut from 0.5% to 0.25%. “These are substantial differences in consumers’ responses,” says Prof. Dr. Winfried Königer. The differences can be traced back to a variety of factors. What is conspicuous with regard to the comparison of the financial circumstances of the various countries, however, is the fact that Spain and Italy have many more home owners.

Affluent people increase their consumption more strongly

Within the populations, too, consumers’ responses differ a great deal. In Germany, for instance, the age group of the 35-44-year-olds registers the smallest increase in consumption (+0.20%) after an unexpected base rate cut, whereas the 65-74-year-olds have the highest increase (+0.54%). The consumption of the most affluent 25 per cent of Germans reacts roughly twice as strongly as consumption in the quartile with the least wealth. Here, too, the two groups with the higher consumption contain more home owners. For Switzerland, a statement in this regard cannot be made since no anonymised data about the households’ detailed financial circumstances are publicly available.

In sum, the studies demonstrate that the monetary policy of the European Central Bank, for example, has different effects in the countries of its sphere of influence, but also within the populations of these countries. Prof. Dr. Winfried Königer: “According to its mandate, a central bank should not take social distribution issues into consideration. However, its decisions have clear effects, which can be addressed through fiscal policies if there is a social will in this respect.”

Links to the study concerning the impact of monetary policy on the real estate market
Link to the summary of the study concerning the impact of monetary policy on the real estate market

Link to the study concerning the impact of monetary policy on private consumption

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https://www.cesifo.org/en/publikationen/2018/working-paper/differences-euro-area-household-finances-and-their-relevance