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Household Debt and Monetary Policy: Revealing the Cash-Flow Channel

Author

Listed:
  • Flodén, Martin

    (Sveriges Riksbank and CEPR)

  • Kilström, Matilda

    (IIES, Stockholm University)

  • Sigurdsson, Jósef

    (IIES, Stockholm University)

  • Vestman, Roine

    (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.

Suggested Citation

  • Flodén, Martin & Kilström, Matilda & Sigurdsson, Jósef & Vestman, Roine, 2017. "Household Debt and Monetary Policy: Revealing the Cash-Flow Channel," Working Paper Series 342, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0342
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary policy; consumption; household debt; variable interest rates; adjustable rate mortgages;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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