Research conducted here at the New York Fed has shown that these lower interest payments resulted in large declines in these borrowers’ default probabilities 3. And two papers presented in our academic sessions yesterday found evidence that these borrowers responded by increasing their consumption of durable goods 4. All this implies that a higher share of ARMs at the start of the financial crisis would likely have enhanced the effectiveness of monetary easing in reducing foreclosures and stimulating the macroeconomy. More generally, the pass-through of monetary policy is likely to be stronger if a high share of mortgage debt has an adjustable interest rate, both in easing and tightening phases of the economic cycle. 5 As a result, the amplitude of interest rate adjustments by the central bank may not need to be quite as large to have the same economic effect. This may be a particularly important consideration when the economy is at or close to the zero-lower bound on interest rates, as the U.S. and many other economies are today. 3  See Tracy and Wright, 2012, Payment Changed and Default Risk: The Impact of Refinancing on Expected Credit Losses, Federal Reserve Bank of New York Staff Report No. 562; and Fuster and Willen, 2012, Payment Size, Negative Equity, and Mortgage Default Federal Reserve Bank of New York Staff Report No. 582. 4  See Keys, Piskorski, Seru and Yao, 2015, Mortgage Rates, Household Balance Sheets, and the Real Economy, and Di Maggio, Kermani and Ramcharan, 2015, Monetary Pass-Through: Household Consumption and Voluntary Deleveraging.
12  4  Kung, 2015, discusses the equilibrium implications of such “shared appreciation mortgages”: http://www.newyorkfed.org/research/conference/2015/mortgage_design/Kung_Edward_housingstructural_052 015.pdf. BIS central bankers’ speeches  BIS central bankers’ speeches  5