The birds, the bees and the Bank? The birth-rate channel of monetary policy

Fergus Cumming and Lisa Dettling

Children are expensive. Swings in families’ cash-flow can therefore move the dial on families’ decisions on whether and when to have a baby. For mortgaged families with an adjustable interest rate in 2008, the sharp fall in Bank Rate amounted to a windfall of around £1,000 per quarter in lower mortgage payments. In this post we show that people responded to this cash-flow boost by having more children. In total, we estimate that monetary policy increased the birth rate in the following three years by around 7.5%. That’s around 50,000 extra babies.

Who received the cash-flow shock?

In a new paper we employ administrative data covering the universe of births and mortgage originations in the UK to explore how the dramatic fall in interest rates in the Great Recession influenced households’ decisions to have a baby. In 2008, around half of UK families of child-bearing age were mortgaged home-owners. Of those, about half had mortgages that were directly tied to Bank Rate. The other half had mortgages on an initial fixed-rate period, which would reset to an adjustable rate sometime over the next few years.

Thus, when the Bank of England lowered its policy rate 4.5 percentage points during 2008 and 2009, about a quarter of families’ mortgage payments fell immediately, another quarter of families’ payments would fall at some point over the next couple of years, and the other half of families would never be affected (see Figure 1). For families with an adjustable rate, interest rate pass-through was sizeable and swift, lowering their mortgage payments by around 42 percent, or 7.5% of their take-home pay. Our paper uses these pre-determined differences in mortgage choices across local authorities and age groups as a “natural experiment” to examine how monetary policy affects families’ fertility decisions over the next three years.

Figure 1: Spatial variation in adjustable rate mortgagors

Sources: ONS, PSD and own calculations.

Our results indicate that a 1 percentage point reduction in Bank Rate – which decreased mortgage payments by 10 percent on average – leads to a 5 percent increase in the birth rate among families on an adjustable-rate mortgage. For the population as a whole, this is equivalent to a 2 percent increase in the UK birth rate. In aggregate, our estimates imply that the loosening of monetary policy in late 2008 and 2009 led to around 15,000 extra babies being born in 2009. In the paper we show that the effects were larger for people with lower incomes or more debt.

Mortgaged families across the pond in the United States were not so lucky. The prevalence of long-term fixed rate mortgages meant that most households saw few immediate benefits of looser monetary policy, at least in terms of their mortgage payments. Although aggregate birth rates rose in the UK over the period we study, in the US there was actually a Great Recession “baby bust”. Figure 2 shows birth rates in the US and UK, with grey recession bars, and the path of monetary policy shown by the dashed black line. In both countries, birth rates begin to fall almost as soon as the unemployment rate begins to rise, but in the UK that trend is reversed once Bank Rate begins to drop, and families keep more of their take-home pay for themselves.

Figure 2: Birth rates in the UK and US in the Great Recession

Note: Solid lines are seasonally adjusted quarterly birth rates by age-group dated to the quarter of conception and expressed per 1,000 women. The dashed line shows the path of Bank Rate (left column) and the Federal Funds Rate (right column). The grey bar indicates the period in which unemployment increased from its trough to its peak in each country during the Great Recession.

Sources: ONS and Bank of England (left column) and NCHS, Census, BLS and Federal Reserve Board (right column).

We show that in the absence of the cut in Bank Rate, declining employment and house prices would have otherwise led to a decline in birth rates in the UK. In other words, the fertility-stimulus effects of UK monetary policy were sufficiently large to outweigh the headwinds of the recession.

All else equal

Of course, we need to show that the drop in interest rates caused a change in UK fertility decisions, particularly since there was a lot going on in the Great Recession. We therefore control for time fixed effects, so that our estimates are net of any changes in economic conditions that affected everyone, regardless of their housing status. We also control for local house prices and unemployment rates to allow for differences in local economic conditions. Essentially, our strategy leverages the fact that all families in a particular age group and local authority are similarly exposed to changing economic conditions, but some families transitioned to an adjustable rate at some point after Bank Rate fell. Cash-flow shocks therefore exhibited variation across both space and time. But it is important that these repayment reductions were indeed a “shock”. Luckily, survey evidence from the summer of 2008 indicates that just 10 percent of households expected rates to fall at all in the coming year.

It is hard to know whether our estimates represent a shift in the timing of births, or in the total number of children. Given the recentness of the Great Recession, we won’t know for sure for another decade or so. But there is some suggestive evidence in favour of a permanent boost to the population. First, birth rates among older women beyond 2010 did not obviously dip down, which might be expected if women were bringing forward their child-bearing plans. Second, survey evidence on interest rate expectations, combined with the sustained low-interest-rate environment, suggests that the shock we study was perceived to be permanent. Standard models suggest this should lead to more babies per woman.

Policy implications

Our paper provides new evidence on one channel of monetary policy transmission to the real economy (though specifically influencing birth rates is not something the Bank aims to do as it falls far outside its remit!). Children are expensive, so a change in birth rates plausibly has spill-over effects on consumer spending. In addition to food, clothing, and other daily necessities, many consumer durables purchases (such as a larger vehicle) are prompted by the addition of a child. Indeed, estimates indicate that the average cost of raising a child during their first year is almost £11,000. If families previously saved this money, the additional 15,000 babies in 2009 could have led to up to £130 million in additional spending in 2009 alone. And although this is surely an upper bound, it does not factor in the costs of raising children beyond their first year (the total cost of raising a child is around £230,000). Moreover, our estimates do not capture some of the indirect effects of monetary policy on birth rates such as through employment, wages or house prices.

Our results have implications beyond the impact on aggregate demand. Fluctuations in cohort and school class sizes have meaningful effects on children’s educational attainment and future labour market outcomes. Meanwhile, parenthood affects labour supply decisions and could have knock-on effects for household income and productivity. Changes in birth rates also eventually feed into population dynamics and dependency ratios, which affect the transmission of monetary policy. And there is evidence that changes in dependency ratios can alter the natural rate of interest.

Monetary policy is often thought to operate with long and variable lags, though few economists have considered the link between interest rates and birth rates. During the Great Recession the birth-rate channel of monetary policy actually operated swiftly as people began having more children soon after rates were slashed (that is, about nine months later).

Fergus Cumming works in the Bank’s Monetary Policy Outlook Division and Lisa Dettling works at the Federal Reserve Board.

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