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Monetary Policy and Household Deleveraging

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  • Martin Harding
  • Mathias Klein

Abstract

This study investigates the interrelation between the household leverage cycle, collateral constraints, and monetary policy. Using data on the U.S. economy, we find that a contractionary monetary policy shock leads to a large and significant fall in economic activity during periods of household deleveraging. In contrast, monetary policy shocks only have insignificant effects during a household leveraging state. These results are robust to alternative definitions of leveraging and deleveraging periods, different ways of identifying monetary policy shocks, controlling for the state of the business cycle, the level of households debt, and financial stress. To provide a structural interpretation for these empirical findings, we estimate a monetary DSGE model with financial frictions and occasionally binding collateral constraints. The model estimates reveal that household deleveraging periods in the data on average coincide with periods of binding collateral constraints whereas constraints tend to turn slack during leveraging episodes. Moreover, the model produces an amplification of monetary policy shocks that is quantitatively comparable to our empirical estimates. These findings indicate that the state-dependent tightness of collateral constraints accounts for the asymmetric effects of monetary policy across the household leverage cycle as found in the data.

Suggested Citation

  • Martin Harding & Mathias Klein, 2019. "Monetary Policy and Household Deleveraging," Discussion Papers of DIW Berlin 1806, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1806
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    References listed on IDEAS

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    Cited by:

    1. Cyril Couaillier & Valerio Scalone, 2020. "How does Financial Vulnerability amplify Housing and Credit Shocks?," Working papers 763, Banque de France.
    2. Max Breitenlechner & Johann Scharler, 2020. "Private Sector Debt, Financial Constraints, and the Effects of Monetary Policy: Evidence from the US," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(4), pages 889-915, August.
    3. Fergus Cumming & Paul Hubert, 2019. "The Role of Households' Borrowing Constraints in the Transmission of Monetary Policy This paper investigates how the transmission of monetary policy to the real economy depends on the distribution of ," Documents de Travail de l'OFCE 2019-20, Observatoire Francais des Conjonctures Economiques (OFCE).
    4. Cumming, Fergus & Hubert, Paul, 2019. "The role of households’ borrowing constraints in the transmission of monetary policy," Bank of England working papers 836, Bank of England, revised 06 Jan 2020.

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    More about this item

    Keywords

    Monetary policy; household leverage; occasionally binding constraints;
    All these keywords.

    JEL classification:

    • 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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