Monetary Policy When Households Have Debt: New Evidence on the Transmission Mechanism

70 Pages Posted: 18 Apr 2016

See all articles by James Cloyne

James Cloyne

University of California, Davis; Bank of England - Monetary Analysis

Clodomiro Ferreira

London Business School

Paolo Surico

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 8, 2016

Abstract

In response to an interest rate change, mortgagors in the United Kingdom and United States adjust their spending significantly (especially on durable goods) but outright home-owners do not. While the dollar change in mortgage payments is nearly three times larger in the United Kingdom than in the United States, these magnitudes are much smaller than the overall change in expenditure. In contrast, the income change is sizable and similar across both household groups and countries. Consistent with the predictions of a simple heterogeneous agents model with credit-constrained households and multi-period fixed-rate debt contracts, our evidence suggests that the general equilibrium effect of monetary policy on income is quantitatively more important than the direct effect on cash flows.

Keywords: Monetary policy, mortgage debt, liquidity constraints

JEL Classification: E21, E32, E52

Suggested Citation

Cloyne, James and Ferreira, Clodomiro and Surico, Paolo, Monetary Policy When Households Have Debt: New Evidence on the Transmission Mechanism (April 8, 2016). Bank of England Working Paper No. 589. Available at SSRN: https://ssrn.com/abstract=2765415 or http://dx.doi.org/10.2139/ssrn.2765415

James Cloyne (Contact Author)

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Clodomiro Ferreira

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Paolo Surico

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
281
Abstract Views
1,395
rank
57,304
PlumX Metrics