Mortgage structure matters not only for monetary policy transmission, but also for financial stability. Adjustable-rate mortgages (ARMs) expose households to rising rates, increasing default risk through higher payments, while fixed-rate mortgages (FRMs) protect households but potentially expose banks to greater interest rate risk. To evaluate these competing forces, we develop a quantitative model with flexible mortgage contracts, liquidity- and net worth-driven household default, and a banking sector with sticky deposits and occasionally binding constraints. We find financial stability risks exhibit a U-shaped relationship with mortgage fixation length. FRMs benefit from deposit rate stickiness, reducing volatility, whereas ARMs provide net worth hedging by concentrating defaults when intermediary net worth is high, thus lowering risk premia. An intermediate fixation length balances these effects, minimizing banking sector volatility and improving aggregate risk-sharing. Our model explains observed differences in delinquencies, house prices, and bank equity prices between ARM and FRM countries during 2022–2023, with implications for mortgage design, macroprudential regulation, and monetary policy.

This paper examines how the duration mismatch of life insurance companies, the largest institutional investors in the US corporate bond market, affects credit spread dynamics. Post-GFC, US life insurers face large and negative duration gaps. When long-term interest rates increase, life insurers realize equity gains, which boost their risk-bearing capacity and compress credit spreads. Empirically, post-2008, corporate bond credit spreads decline when long rates rise, which holds both unconditionally and around monetary policy announcements. In the cross-section, I utilize a regression discontinuity design to confirm that this negative co-movement is more pronounced for bonds held more by life insurers.

We provide novel evidence on how monetary policy affects inflation through the floating rate channel. Using euro-area corporate loan data from 2021 to 2023, we find that the short-run impact of monetary tightening on inflation is 50% smaller in markets dominated by floating-rate loans. Firms with floating-rate loans keep prices elevated to offset higher borrowing costs, thereby reducing the effectiveness of monetary policy tightening. This effect is stronger in concentrated, high mark-up markets, where firms can more easily pass on higher prices to their customers, as well as in markets with highly leveraged or illiquid firms. Since firms with floating-rate loans face an increase in their financial burden, their loan terms are more frequently renegotiated, often resulting in reduced spreads and a shift from floating to fixed rates. The varying prevalence of floating-rate loans helps explain the heterogeneity in monetary policy transmission within the euro-area, as floating rate contracts are more prevalent in peripheral countries, whereas fixed rates contracts are more common in core countries.