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

79 Pages Posted: 7 Jun 2018

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: May 31, 2018

Abstract

How do changes in monetary policy affect consumption? Using household data for the US and the UK, we show that most of the aggregate response of consumption to interest rates is driven by households with a mortgage. Outright home owners do not adjust expenditure at all and renters change their spending but by less than mortgagors. Income rises for all households as interest rate cuts directly affect firm investment and household consumption, boosting aggregate demand. A key dierence between these housing tenure groups is the composition of their balance sheets: mortgagors hold sizable illiquid assets but little liquid wealth, consistent with a higher marginal propensity to consume.

Keywords: monetary policy, household balance sheets, 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 (May 31, 2018). Banco de Espana Working Paper No. 1813. Available at SSRN: https://ssrn.com/abstract=3188024 or http://dx.doi.org/10.2139/ssrn.3188024

James Cloyne (Contact Author)

University of California, Davis ( email )

One Shields Avenue
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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

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