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The Distribution of Households' Indebtedness and the Transmission of Monetary Policy

Author

Listed:
  • Fergus Cumming

    (Bank of England)

  • Paul Hubert

    (Banque de France and Sciences Po–OFCE)

Abstract

We investigate whether the dynamic response of aggregate consumption to monetary policy depends on the distribution of household debt relative to income. Using U.K. loan-level microdata, we propose a novel approach to isolate the fraction of households with a limited ability to smooth consumption. By exploiting time and cross-sectional variation, we show that consumption responds more to monetary policy when the share of highly indebted households is large, but find no state contingency with respect to the overall level of debt-to-income. Our results highlight the role of household heterogeneity for understanding monetary transmission to aggregate consumption.

Suggested Citation

  • Fergus Cumming & Paul Hubert, 2023. "The Distribution of Households' Indebtedness and the Transmission of Monetary Policy," The Review of Economics and Statistics, MIT Press, vol. 105(5), pages 1304-1313, September.
    • Handle: RePEc:tpr:restat:v:105:y:2023:i:5:p:1304-1313
    DOI: 10.1162/rest_a_01094
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