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Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism

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  • Cloyne, James
  • Ferreira, Clodomiro
  • Surico, Paolo

Abstract

In response to an interest rate change, mortgagors in the U.K. and U.S. adjust their spending significantly (especially on durable goods) but outright home-owners do not. While the dollar change in mortgage payments is nearly three times larger in the U.K. than in the U.S., these magnitudes are much smaller than the overall change in expenditure. In contrast, the income change is sizable and similar across both household groups and countries. Consistent with the predictions of a simple heterogeneous agents model with credit- constrained households and multi-period fixed-rate debt contracts, our evidence suggests that the general equilibrium effect of monetary policy on income is quantitatively more important than the direct effect on cashflows.

Suggested Citation

  • Cloyne, James & Ferreira, Clodomiro & Surico, Paolo, 2015. "Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism," CEPR Discussion Papers 11023, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11023
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    Cited by:

    1. Tullio Jappelli & Annalisa Scognamiglio, 2016. "Monetary Policy, Mortgages and Consumption: Evidence from Italy," CSEF Working Papers 454, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    2. Gianluca Violante & Benjamin Moll & Greg Kaplan, 2015. "Monetary Policy According to HANK," 2015 Meeting Papers 1507, Society for Economic Dynamics.
    3. Huo, Zhen & Ríos-Rull, José-Víctor, 2016. "Financial Frictions, Asset Prices, and the Great Recession," CEPR Discussion Papers 11544, C.E.P.R. Discussion Papers.
    4. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2017. "A theory of price adjustment under loss aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 78-95.
    5. Gabor Pinter & Angus Foulis & Saleem Bahaj, 2016. "The Residential Collateral Channel," 2016 Meeting Papers 502, Society for Economic Dynamics.
    6. Roine Vestman & Matilda Kilström & Josef Sigurdsson & Martin Floden, 2016. "Household Debt and Monetary Policy: Revealing the Cash-Flow Channel," 2016 Meeting Papers 1015, Society for Economic Dynamics.
    7. Mario Pietrunti & Federico M. Signoretti, 2017. "Monetary policy in times of debt," Temi di discussione (Economic working papers) 1142, Bank of Italy, Economic Research and International Relations Area.
    8. Massenot, Baptiste, 2018. "A business cycle model with neuroeconomic foundations," SAFE Working Paper Series 194, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    9. Ferrero, Andrea & Harrison, Richard & Nelson, Ben, 2018. "Concerted efforts? Monetary policy and macro-prudential tools," Bank of England working papers 727, Bank of England.
    10. Stefano Neri & Giuseppe Ferrero, 2017. "Monetary policy in a low interest rate environment," Questioni di Economia e Finanza (Occasional Papers) 392, Bank of Italy, Economic Research and International Relations Area.
    11. Ralph Luetticke, 2018. "Transmission of Monetary Policy with Heterogeneity in Household Portfolios," Discussion Papers 1819, Centre for Macroeconomics (CFM).
    12. Andrea Colciago & Anna Samarina & Jakob de Haan, 2018. "Central bank policies and income and wealth inequality: A survey," DNB Working Papers 594, Netherlands Central Bank, Research Department.
    13. Michael Reiter & Philipp Hergovich, 2016. "Housing and the Redistributive Effects of Monetary Policy," 2016 Meeting Papers 1324, Society for Economic Dynamics.
    14. Bilbiie, Florin Ovidiu, 2017. "The New Keynesian Cross: Understanding Monetary Policy with Hand-to-Mouth Households," CEPR Discussion Papers 11989, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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