Household Debt and Monetary Policy: Revealing the Cash-Flow Channel
Sveriges Riksbank Working Paper Series No. 342
41 Pages Posted: 26 Jan 2018 Last revised: 20 Feb 2018
Date Written: September 1, 2017
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: Suggested Citation