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How Do Interest Rates Affect Consumption? Household Debt and the Role of Asset Prices

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  • Foulis, Angus
  • Hazell, Jonathon
  • Mian, Atif
  • Tracey, Belinda

Abstract

This paper estimates how rate cuts increase consumption, via debt and asset prices. Using administrative UK data on mortgages and consumption, we exploit the expiry of fixed-rate mortgages to construct six million household-level natural experiments. A 1 pp reduction in mortgage rates raises consumption by 3% in the following 6 months. Using plausibly exogenous variation in how house prices respond to rate cuts, we show that consumption increases mostly because households borrow against higher house prices; lower debt service after rate cuts matters less. These results suggest that in large part, monetary policy affects consumption through asset prices and borrowing.

Suggested Citation

  • Foulis, Angus & Hazell, Jonathon & Mian, Atif & Tracey, Belinda, 2026. "How Do Interest Rates Affect Consumption? Household Debt and the Role of Asset Prices," CEPR Discussion Papers 21243, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:21243
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