Monetary Policy and Household Deleveraging

56 Pages Posted: 17 Jul 2019

See all articles by Martin Harding

Martin Harding

German Institute for Economic Research (DIW Berlin), Students

Mathias Klein

German Institute for Economic Research (DIW Berlin)

Date Written: June 2019


This study investigates the interrelation between the household leverage cycle, collateral constraints, and monetary policy. Using data on the U.S. economy, we find that a contractionary monetary policy shock leads to a large and significant fall in economic activity during periods of household deleveraging. In contrast, monetary policy shocks only have insignificant effects during a household leveraging state. These results are robust to alternative definitions of leveraging and deleveraging periods, different ways of identifying monetary policy shocks, controlling for the state of the business cycle, the level of households debt, and financial stress. To provide a structural interpretation for these empirical findings, we estimate a monetary DSGE model with financial frictions and occasionally binding collateral constraints. The model estimates reveal that household deleveraging periods in the data on average coincide with periods of binding collateral constraints whereas constraints tend to turn slack during leveraging episodes. Moreover, the model produces an amplification of monetary policy shocks that is quantitatively comparable to our empirical estimates. These findings indicate that the state-dependent tightness of collateral constraints accounts for the asymmetric effects of monetary policy across the household leverage cycle as found in the data.

Keywords: monetary policy, household leverage, occasionally binding constraints

JEL Classification: E32, E52

Suggested Citation

Harding, Martin and Klein, Mathias, Monetary Policy and Household Deleveraging (June 2019). DIW Berlin Discussion Paper No. 1806, 2019. Available at SSRN: or

Martin Harding

German Institute for Economic Research (DIW Berlin), Students ( email )


Mathias Klein (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117

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