Monetary Policy Pass-Through: Household Consumption and Voluntary Deleveraging

77 Pages Posted: 3 Sep 2014 Last revised: 5 Dec 2014

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Amir Kermani

University of California, Berkeley; National Bureau of Economic Research (NBER)

Rodney Ramcharan

University of Southern California, Marshall School of Business

Date Written: November 25, 2014

Abstract

Do households benefit from expansionary monetary policy? We investigate how indebted households' consumption and saving decisions are affected by anticipated changes in monthly interest payments. We focus on borrowers with adjustable rate mortgages originated between 2005 and 2007 featuring an automatic reset of the interest rate after five years. The monthly payment due from the average borrower falls by 52 percent ($900) upon reset, resulting in an increase in disposable income totaling tens of thousands of dollars over the remaining life of the mortgage. We uncover three patterns. First, the average household increases monthly car purchases by 40 percent ($150) upon reset. Second, this expansionary effect is attenuated by the borrowers' voluntary deleveraging, as a significant fraction of the increased income is deployed to accelerate debt repayment. Third, the marginal propensity to consume is significantly higher for low income borrowers and for those that had experienced a larger decline in housing wealth. To complement these household-level findings, we employ county-level data to provide evidence that consumption responded more to a reduction in short-term interest rates in counties with a larger fraction of adjustable rate mortgage debt. Our results shed light on the income channel of monetary policy as well as the role of debt rigidity in reducing the effectiveness of monetary policy.

Keywords: Monetary policy, Household finance, Refinancing, Contract rigidities, Debt rigidity, MPC, deleveraging

JEL Classification: E20, E30, E51, G28

Suggested Citation

Di Maggio, Marco and Kermani, Amir and Ramcharan, Rodney, Monetary Policy Pass-Through: Household Consumption and Voluntary Deleveraging (November 25, 2014). Columbia Business School Research Paper No. 14-24. Available at SSRN: https://ssrn.com/abstract=2489793 or http://dx.doi.org/10.2139/ssrn.2489793

Marco Di Maggio (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amir Kermani

University of California, Berkeley ( email )

2220 Piedmont Ave
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/amir/research/research.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rodney Ramcharan

University of Southern California, Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.google.com/site/rodneyramcharan/

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