Asymmetric Effects of Interest Rate Changes: The Role of the Consumption-Wealth Channel

24 Pages Posted: 20 Feb 2008 Last revised: 31 Jan 2014

See all articles by Andy W. Mullineux

Andy W. Mullineux

University of Birmingham

Garry MacDonald

Curtin University - School of Economics and Finance

Rudra Sensarma

University of Birmingham - Birmingham Business School

Date Written: April 26, 2007

Abstract

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

Mullineux, Andy W. and MacDonald, Garry and Sensarma, Rudra, Asymmetric Effects of Interest Rate Changes: The Role of the Consumption-Wealth Channel (April 26, 2007). Available at SSRN: https://ssrn.com/abstract=1095693 or http://dx.doi.org/10.2139/ssrn.1095693

Andy W. Mullineux

University of Birmingham ( email )

Birmingham Business School
University House
Birmingham, B15 2TT
United Kingdom

Garry MacDonald

Curtin University - School of Economics and Finance ( email )

GPO Box U 1987
Perth, Western Australia 6845
Australia
+61 892267724 (Phone)

Rudra Sensarma (Contact Author)

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

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