The Role of Households’ Borrowing Constraints in the Transmission of Monetary Policy
27 Pages Posted: 24 Dec 2019 Last revised: 18 Jan 2020
Date Written: December 20, 2019
Abstract
This paper investigates how the transmission of monetary policy to the real economy depends on the distribution of household debt. Using an original loan-level dataset covering the universe of UK mortgages, we assess the effect of monetary shocks on aggregate consumption by exploiting time variation in a measure of the proportion of households close to their borrowing constraint. We find that monetary policy is most potent when there is a large share of constrained households. In contrast, we find no evidence that the average level of borrowing relative-to-income of the household sector affects the transmission of monetary policy.
Keywords: heterogeneity, distributions, mortgage debt, state-dependence
JEL Classification: E21, E52, E58
Suggested Citation: Suggested Citation