MONETARY POLICY AND FERTILITY: UK evidence that lower interest rates boost birth rates

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 UK-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.

New research shows that people responded to this cash-flow boost by having more children. In total, the study by Fergus Cumming estimates that monetary policy increased the birth rate in the following three years by around 7.5%. That’s around 50,000 extra babies.

The research employs 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.

When the Bank of England lowered its policy rate 4.5 percentage points at the end of 2008, about a quarter of families’ mortgage payments fell immediately. For families with an adjustable rate, interest rate pass-through was sizeable and swift, lowering their mortgage payments by around 40%, or 7.5% of their take-home pay.

The research uses the Great Recession as a ‘natural experiment’ to examine how monetary policy affects families’ fertility decisions over the next three years.

The results indicate that a 1 percentage point reduction in Bank Rate – which decreased mortgage payments by 10% on average – leads to a 5% increase in the birth rate among families on an adjustable-rate mortgage. For the population as a whole, this is equivalent to a 2% increase in the UK birth rate.

In aggregate, the estimates imply that the loosening of monetary policy in late 2008 and 2009 led to around 15,000 extra babies being born in 2009. The study shows 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 studied, in the United States there was actually a Great Recession ‘baby bust’. 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.

The study provides new evidence on one channel of monetary policy transmission to the real economy. A change in birth rates plausibly has spillover effects on consumer spending. 

But the results also 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 long-run interest rates.

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



Twitter: @fergusac


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