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Household Balance Sheet Channels of Monetary Policy: A Back of the Envelope Calculation for the Euro Area

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  • Slacalek, Jiri
  • Tristani, Oreste
  • Violante, Giovanni L.

Abstract

This paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures. We analyze several transmission mechanisms operating through direct, partial equilibrium channels-intertemporal substitution and net interest rate exposure-and indirect, general equilibrium channels-net nominal exposure, as well as wealth, collateral and labor income channels. The strength of these forces varies across households depending on their marginal propensities to consume, their balance sheet composition, the sensitivity of their own earnings to fluctuations in aggregate labor income, and the responsiveness of aggregate earnings, asset prices and inflation to monetary policy shocks. We quantify all these channels in the euro area by combining micro data from the HFCS and the EU-LFS with structural VARs estimated on aggregate time series. We find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross-country heterogeneity in these responses.

Suggested Citation

  • Slacalek, Jiri & Tristani, Oreste & Violante, Giovanni L., 2019. "Household Balance Sheet Channels of Monetary Policy: A Back of the Envelope Calculation for the Euro Area," CEPR Discussion Papers 14245, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14245
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    5. Giacomo Rella, 2021. "The Fed, housing and household debt over time," Department of Economics University of Siena 850, Department of Economics, University of Siena.
    6. Garriga, Carlos & Kydland, Finn E. & Šustek, Roman, 2021. "MoNK: Mortgages in a New-Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 123(C).
    7. Vladimir Asriyan & Luc Laeven & Alberto Martin & Alejandro Van der Ghote & Victoria Vanasco, 2021. "Falling interest rates and credit misallocation: Lessons from general equilibrium," Economics Working Papers 1784, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2021.
    8. Brand, Claus & Obstbaum, Meri & Coenen, Günter & Sondermann, David & Lydon, Reamonn & Ajevskis, Viktors & Hammermann, Felix & Angino, Siria & Hernborg, Nils & Basso, Henrique & Hertweck, Matthias & Bi, 2021. "Employment and the conduct of monetary policy in the euro area," Occasional Paper Series 275, European Central Bank.
    9. Daniel H. Cooper & Vaishali Garga & Maria Jose Luengo-Prado, 2021. "The Mortgage Cash Flow Channel of Monetary Policy Transmission: A Tale of Two Countries," Working Papers 21-8, Federal Reserve Bank of Boston.
    10. Giancarlo Corsetti & Joao B. Duarte & Samuel Mann, 2020. "One Money, Many Markets: Monetary Transmission and Housing Financing in the Euro Area," IMF Working Papers 2020/108, International Monetary Fund.
    11. Hubert Paul, 2021. "Does household mortgage debt influence the transmission of monetary policy in the United Kingdom? [L’endettement immobilier des ménages influence-t-il la transmission de la politique monétaire au R," Bulletin de la Banque de France, Banque de France, issue 236.
    12. Tzamourani, Panagiota, 2021. "The interest rate exposure of euro area households," European Economic Review, Elsevier, vol. 132(C).
    13. Asger Lau Andersen & Niels Johannesen & Mia Jørgensen & José-Luis Peydró, 2020. "Monetary policy and inequality," Economics Working Papers 1761, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2021.
    14. Sá, Diogo, 2022. "Liquidity constraints and fiscal multipliers," MPRA Paper 112132, University Library of Munich, Germany.
    15. Sigal Ribon, 2020. "Differential Effects of Monetary Policy on Household Consumption: The Case of Israel," Bank of Israel Working Papers 2020.12, Bank of Israel.
    16. Alice Albonico & Guido Ascari & Qazi Haque, 2020. "The (ir)relevance of rule-of-thumb consumers for US business cycle fluctuations," CAMA Working Papers 2020-102, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    17. Laeven, Luc & Maddaloni, Angela & Mendicino, Caterina, 2022. "Monetary policy, macroprudential policy and financial stability," Working Paper Series 2647, European Central Bank.
    18. Dirección General de Economía y Estadística, 2020. "El mercado de la vivienda en España entre 2014 y 2019," Occasional Papers 2013, Banco de España.
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    More about this item

    Keywords

    Consumption; Euro Area; Household Balance Sheets; marginal propensity to consume; monetary policy; wealth distribution;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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