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Asymmetric effects of interest rate changes: the role of the consumption-wealth channel

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  • Garry MacDonald
  • Andy Mullineux
  • Rudra Sensarma

Abstract

This article examines the role of the consumption-wealth channel in explaining asymmetric effects of monetary policy changes. Towards this end, we draw upon available literature on the consumption function and behavioural finance to construct a framework for asymmetric effects of monetary policy caused by the impact of wealth changes on aggregate consumption. We then employ data from the UK to examine the validity of the proposed framework. In the context of a liberalized economy with easy access to consumer credit, wealth reduction due to monetary tightening is expected to have weaker impact on spending than increase in wealth. Our results validate the above hypothesis.

Suggested Citation

  • Garry MacDonald & Andy Mullineux & Rudra Sensarma, 2011. "Asymmetric effects of interest rate changes: the role of the consumption-wealth channel," Applied Economics, Taylor & Francis Journals, vol. 43(16), pages 1991-2001.
  • Handle: RePEc:taf:applec:v:43:y:2011:i:16:p:1991-2001
    DOI: 10.1080/00036840902950572
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    References listed on IDEAS

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    1. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters,in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
    2. Robert R. Bliss & George G. Kaufman, 2002. "Explaining bank credit crunches and procylicality," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Jul.
    3. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, June.
    4. Nicholas Apergis & Stephen M. Miller, 2004. "Consumption Asymmetry and the Stock Market: Further Evidence," Working papers 2004-19, University of Connecticut, Department of Economics.
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    Cited by:

    1. Khundrakpam, Jeevan Kumar, 2013. "Are there Asymmetric Effects of Monetary Policy in India?," MPRA Paper 53059, University Library of Munich, Germany.
    2. Paradiso, Antonio & Casadio, Paolo & Rao, B. Bhaskara, 2012. "US inflation and consumption: A long-term perspective with a level shift," Economic Modelling, Elsevier, vol. 29(5), pages 1837-1849.
    3. Imran Hussain Shah & Simón Sosvilla-Rivero, 2017. "Seeking price and macroeconomic stabilisation in the euro area: The role of house prices and stock prices," IREA Working Papers 201710, University of Barcelona, Research Institute of Applied Economics, revised May 2017.
    4. Andrew William (Andy) Mullineux, 2010. "Financial innovation and social welfare," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 18(3), pages 243-256, July.
    5. Casadio, Paolo & Paradiso, Antonio, 2010. "Inflation and consumption in a long term perspective with level shift," MPRA Paper 25980, University Library of Munich, Germany.
    6. Imran Hussain Shaha & Simón Sosvilla-Rivero, 2017. "Seeking price and macroeconomic stabilisation in the euro area: The role of house prices and stock prices," Working Papers del Instituto Complutense de Estudios Internacionales 1707, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales.

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