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Household Debt and Monetary Policy: Revealing the Cash-Flow Channel

39 Pages Posted: 16 Mar 2016 Last revised: 3 Sep 2017

Martin Flodén

Sveriges Riksbank; Stockholm University; Centre for Economic Policy Research (CEPR)

Matilda Kilström

Stockholm University - Institute for International Economic Studies (IIES)

Josef Sigurdsson

IIES, Stockholm University

Roine Vestman

Stockholm University - Department of Economics; Swedish House of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 2, 2017

Abstract

We examine the cash-flow channel of monetary policy, i.e. the effect of monetary policy on spending when households hold debt linked to short-term rates such as adjustable rate mortgages (ARMs). Using registry-based data on Swedish households, we estimate substantial heterogeneity in consumption responses to a change in monetary policy through the cash-flow channel. Our findings imply that monetary policy has a stronger effect on real economic activity when households are highly indebted and have ARMs. For homeowners with a debt-to-income ratio of around 3 and ARMs, the estimated response is equivalent to a marginal propensity to consume of 0.5.

Keywords: Monetary policy, consumption, household debt, variable interest rates, adjustable rate mortgages

JEL Classification: D14, E21, E52, G11

Suggested Citation

Flodén, Martin and Kilström, Matilda and Sigurdsson, Josef and Vestman, Roine, Household Debt and Monetary Policy: Revealing the Cash-Flow Channel (September 2, 2017). Swedish House of Finance Research Paper No. 16-8. Available at SSRN: https://ssrn.com/abstract=2748232 or http://dx.doi.org/10.2139/ssrn.2748232

Martin Flodén

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

HOME PAGE: http://www.martinfloden.net

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Matilda Kilström

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden

Josef Sigurdsson

IIES, Stockholm University ( email )

Stockholm, SE-10691
Sweden

HOME PAGE: http://josefsigurdsson.com

Roine Vestman (Contact Author)

Stockholm University - Department of Economics ( email )

Universitetsvägen 10 A
House A, floor 4 and 7
Frescati, Stockholm
Sweden

HOME PAGE: http://www.ne.su.se/

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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