Asymmetric Effects of Interest Rate Changes: The Role of the Consumption-Wealth Channel
24 Pages Posted: 20 Feb 2008 Last revised: 31 Jan 2014
Date Written: April 26, 2007
This paper examines the role of the consumption-wealth channel in explaining asymmetric effects of monetary policy changes. Towards this end, we draw upon available literature on the consumption function and behavioural finance to construct a framework for asymmetric effects of monetary policy caused by the impact of wealth changes on aggregate consumption. We then employ data from the UK to examine the validity of the proposed framework. In the context of a liberalized economy with easy access to consumer credit, wealth reduction due to monetary tightening is expected to have weaker impact on spending than increase in wealth. Our results validate the above hypothesis.
Keywords: asymmetry, interest rate, consumption, wealth channel
JEL Classification: E52, D12, E44
Suggested Citation: Suggested Citation