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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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    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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