Beyond the Aggregate: Heterogeneous Effects of Monetary Policy on Credit Allocation

How does monetary policy affect mortgage allocation across income groups? Using comprehensive credit registry data from Malaysia (2017-2023), we examine the distributional effects of monetary policy shocks on new mortgage demand, probability of approvals, value of new mortgage originations, maturity of new mortgages, and search activity. Exploiting high-frequency policy surprises and granular loan-level and borrower-level data, we find that monetary policy shocks disproportionately impact higher-income households. On average, a positive 100 basis point policy rate shock reduces the value of mortgage applications by 1.45 percent and new loan values by 8.5 percent. The marginal effects of a monetary policy shocks are larger and significant for the top four income deciles. Middle-income applicants face a modest decrease in approval probabilities, while lower-income groups remain largely unaffected. Policy tightening also increases multiple-bank applications (search activity) primarily among higher-income borrowers. Our results demonstrate substantial heterogeneity in the transmission of monetary policy through the mortgage market across the income distribution.