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

66 Pages Posted: 11 Sep 2017 Last revised: 16 Dec 2019

See all articles by Martin Flodén

Martin Flodén

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

Matilda Kilström

Stockholm School of Economics - Department of Economics

Jósef Sigurdsson

Stockholm University - Institute for International Economic Studies (IIES)

Roine Vestman

Stockholm University - Department of Economics; Swedish House of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: September 2017

Abstract

We examine the effect of monetary policy on household spending when households are indebted and interest rates on outstanding loans are linked to short-term interest rates. Using administrative data on balance sheets and consumption expenditure of Swedish households, we reveal the cash-flow transmission channel of monetary policy. On average, indebted households reduce consumption spending by an additional 0.25-0.35 percentage points in response to a one-percentage-point increase in the policy rate, relative to a household with no debt. This is true among households with low or high levels of illiquid wealth, such as homeowners, who hold disproportionally little liquid wealth and display hand-to-mouth behavior when faced with increased interest expenses. We show that these responses are driven by households that have some or a large share of their debt in contracts where interest rates vary with short-term interest rates, such as adjustable-rate mortgages (ARMs), which implies that monetary policy shocks are quickly passed through to interest expenses.

Keywords: adjustable rate mortgages, Consumption, Household Debt, monetary policy

JEL Classification: D14, E21, E52, G11

Suggested Citation

Flodén, Martin and Kilström, Matilda and Sigurdsson, Jósef and Vestman, Roine, Household Debt and Monetary Policy: Revealing the Cash-Flow Channel (September 2017). CEPR Discussion Paper No. DP12270, Available at SSRN: https://ssrn.com/abstract=3035264

Martin Flodén (Contact Author)

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 )

London
United Kingdom

Matilda Kilström

Stockholm School of Economics - Department of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Jósef Sigurdsson

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

Stockholm
Sweden

Roine Vestman

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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