Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 342: Household Debt and Monetary Policy: Revealing the Cash-Flow Channel

Martin Flodén, Matilda Kilström, Jósef Sigurdsson and Roine Vestman ()
Additional contact information
Martin Flodén: Sveriges Riksbank and CEPR
Matilda Kilström: IIES, Stockholm University
Jósef Sigurdsson: IIES, Stockholm University
Roine Vestman: Stockholm University and SHoF

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

JEL-codes: D14; E21; E52; G11

48 pages, September 1, 2017

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