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Household Debt Overhang and Transmission of Monetary Policy

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  • SAMI ALPANDA
  • SARAH ZUBAIRY

Abstract

We investigate how the level of household indebtedness affects the monetary transmission mechanism in the U.S. economy. Using state‐dependent local projection methods, we find that the effects of monetary policy are less powerful during periods of high household debt. In particular, the impact of monetary policy shocks is smaller on GDP, consumption, residential investment, house prices, and household debt during a high‐debt state. We then build a partial equilibrium model of borrower households with financial constraints to rationalize these facts. The model points to the weakening of the home equity loan channel as a possible reason for the decline in monetary policy effectiveness when initial debt levels are high.

Suggested Citation

  • Sami Alpanda & Sarah Zubairy, 2019. "Household Debt Overhang and Transmission of Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(5), pages 1265-1307, August.
    • Handle: RePEc:wly:jmoncb:v:51:y:2019:i:5:p:1265-1307
    DOI: 10.1111/jmcb.12548
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