Monetary Policy When Households Have Debt: New Evidence on the Transmission Mechanism
79 Pages Posted: 7 Jun 2018
Date Written: May 31, 2018
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: Suggested Citation