Working Paper Series, Sveriges Riksbank (Central Bank of Sweden)
Martin Flodén, Matilda Kilström, Jósef Sigurdsson and Roine Vestman
Household Debt and Monetary Policy: Revealing the Cash-Flow Channel
Abstract: We examine the cash-flow channel of monetary policy, i.e.
the effect of monetary policy on spending when households hold debt linked
to short-term rates such as adjustable rate mortgages (ARMs). Using
registry-based data on Swedish households, we estimate substantial
heterogeneity in consumption responses to a change in monetary policy
through the cash-flow channel. Our findings imply that monetary policy has
a stronger effect on real economic activity when households are highly
indebted and have ARMs. For homeowners with a debtto- income ratio of
around 3 and ARMs, the estimated response is equivalent to a marginal
propensity to consume of 0.5.
Keywords: Monetary policy; consumption; household debt; variable interest rates; adjustable rate mortgages; (follow links to similar papers)
JEL-Codes: D14; E21; E52; G11; (follow links to similar papers)
48 pages, September 1, 2017
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