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The uncertainty-driven channel of monetary transmission on household consumption: the role of households’ balance sheet positions

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  • Priya, Pragati
  • Sharma, Chandan

Abstract

We investigate the combined effects of contractionary monetary policy shocks and policy uncertainty on household consumption behavior. Monetary tightening policies are associated with high uncertainty in the macroeconomy, which can exacerbate their effects on economic agents. Using large-scale administrative survey data on Indian households during 2015Q1-2019Q4, we show that contractionary monetary shocks have a further dampening effect on household consumption when combined with policy uncertainty, indicating the uncertainty-driven channel of monetary transmission. These joint effects intensify the cautiousness and risk aversion tendencies among households, which are reflected in their lower willingness to spend. Furthermore, spending on durable goods is more vulnerable to these effects as compared to nondurables. Lastly, we also study the heterogeneous responses of households to these effects based on their balance sheet positions. We find that households with weaker balance sheet positions in terms of net financial savings and debt status exhibit a higher reduction in their consumption spending due to these effects than households with stronger positions.

Suggested Citation

  • Priya, Pragati & Sharma, Chandan, 2025. "The uncertainty-driven channel of monetary transmission on household consumption: the role of households’ balance sheet positions," International Review of Economics & Finance, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:reveco:v:103:y:2025:i:c:s1059056025006707
    DOI: 10.1016/j.iref.2025.104507
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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