The Effect of Monetary Policy On Divorce: Evidence From Australia Between 2007 And 2018

Abstract: The effect of monetary policy on divorce has implications on intra-household resource allocation and inequality. This thesis utilizes the HILDA data in Australia between 2007 and 2018. It has identified three potentially unexpected monetary policy shocks that could affect marital status. Theories imply that monetary policy can affect divorce via total income and role specialization effects. The analysis uses variable and fixed-rate mortgages to differentiate between treatment and control groups. Initially, it finds little to no effect. However, the robustness test shows that a rise of 1.75% in the interest rate can reduce the divorce rate by 5%-6% compared to the subset of the control group, which has a fixed rate and a high loan-to-value ratio. Women are subject to the biggest consumption loss as the Pareto rate is low. A possible explanation is that both partners participate in the labor force among the variable rate group. It implies that the total income effect overwhelms the role specialization effect. Therefore, it means that future research related to the causal effect of monetary policy on households can take advantage of immense unexpected interest rate shocks to study behavioral changes and intra-household inequality.