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How Does Monetary Policy Affect Household Indebtedness?

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  • Andreas Fagereng
  • Magnus A. H. Gulbrandsen
  • Martin Holm
  • Gisle Natvik

Abstract

Growth in household debt-to-income ratios can be attributed to nominal debt changes or mechanical “Fisher effects” from interest income and expenses, real income growth, and inflation. With microdata covering the universe of Norwegian households for more than 20 years, we decompose the importance of these channels for how debt-toincome ratios evolve over time and respond to monetary policy shocks. On average, debt changes outsize Fisher effects, and they are due to households who move. But among highly leveraged households, Fisher effects dominate. After interest rate hikes, debt changes and Fisher effects pull in opposite directions. The former dominate so that debt-to-income ratios fall. This pattern holds across sub-groups, even among highly indebted households. Hence, changes in borrowing and repayment dominate mechanical effects via nominal income growth in the transmission of monetary policy shocks to debt-to-income ratios.

Suggested Citation

  • Andreas Fagereng & Magnus A. H. Gulbrandsen & Martin Holm & Gisle Natvik, 2023. "How Does Monetary Policy Affect Household Indebtedness?," Working Papers 05/2023, Centre for Household Finance and Macroeconomic Research (HOFIMAR), BI Norwegian Business School.
    • Handle: RePEc:bbq:wpaper:0005
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    More about this item

    Keywords

    Household Debt; Monetary Policy;

    JEL classification:

    • 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
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G5 - Financial Economics - - Household Finance

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