Disaggregating Household Sensitivity to Monetary Policy by Expenditure Category

Because the Bank of Canada has started withdrawing monetary stimulus, monitoring the transmission of these changes to monetary policy will be important. Subcomponents of consumption and housing will likely respond differently to a monetary policy tightening, both in terms of the aggregate effect and timing. These differences may be informative for monitoring household responsiveness to, and tracking the transmission of, changes to monetary policy. The authors therefore estimate an empirical model to measure the effects of monetary policy shocks on household expenditures. We find that monetary policy shocks will have a greater, and generally quicker, effect on residential investment than they do on consumption. On average across interest-rate-sensitive subcomponents of real household expenditure, most of the impact is felt on the level after about seven quarters. For residential investment, new construction and ownership transfer costs are affected the most. For consumption, durables and items thought to be highly discretionary (e.g., food and beverages away from home and accommodation services), appear most sensitive to monetary policy shocks.