Has Higher Household Indebtedness Weakened Monetary Policy Transmission?

34 Pages Posted: 13 Feb 2019

See all articles by Gaston Gelos

Gaston Gelos

International Monetary Fund

Federico Grinberg

International Monetary Fund

Tommaso Mancini Griffoli

International Monetary Fund (IMF)

Shujaat Khan

Johns Hopkins University

Machiko Narita

International Monetary Fund (IMF)

Umang Rawat

International Monetary Fund (IMF)

Date Written: January 2019

Abstract

Has monetary policy in advanced economies been less effective since the global financial crisis because of deteriorating household balance sheets? This paper examines the question using household data from the United States. It compares the responsiveness of household consumption to monetary policy shocks in the pre- and post-crisis periods, relating changes in monetary transmission to changes in household indebtedness and liquidity. The results show that the responsiveness of household consumption has diminished since the crisis. However, household balance sheets are not the culprit. Households with higher debt levels and lower shares of liquid assets are the most responsive to monetary policy, and the share of these households in the population grew. Other factors, such as economic uncertainty, appear to have played a bigger role in the decline of households' responsiveness to monetary policy.

Keywords: Monetary policy, Consumption, transmission, households, real estate, leverage, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects), Consumer Economics: Empirical Analysis

JEL Classification: E44, E52, D12

Suggested Citation

Gelos, R. Gaston and Grinberg, Federico and Mancini Griffoli, Tommaso and Khan, Shujaat and Narita, Machiko and Rawat, Umang, Has Higher Household Indebtedness Weakened Monetary Policy Transmission? (January 2019). IMF Working Paper No. 19/11. Available at SSRN: https://ssrn.com/abstract=3333735

R. Gaston Gelos (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Federico Grinberg

International Monetary Fund ( email )

700 19th St NW
Washington, DC 20431
United States

Tommaso Mancini Griffoli

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Shujaat Khan

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Machiko Narita

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Umang Rawat

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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