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Household Consumption Does Not Respond Directly to Interest Rates: Evidence From 10 Macroeconomic Shocks

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Abstract

We estimate how much household spending responds directly to changes in interest rates. We develop a Bayesian procedure that uses the empirical impulse responses to macroeconomic shocks to discipline the consumer block of a HANK model. The procedure can be applied shock-by-shock or pooled jointly. We apply this method in two ways using 10 macroeconomic shocks: a structural model with sticky expectations over both income and interest rates, and a non-parametric estimation of the consumption-to-interest-rate Jacobian. We find no evidence that households respond directly to interest rates at any horizon, leaving essentially no role for a direct interest rate channel.

Suggested Citation

  • Edmund Crawley & William L. Gamber, 2025. "Household Consumption Does Not Respond Directly to Interest Rates: Evidence From 10 Macroeconomic Shocks," Finance and Economics Discussion Series 2025-021r1, Board of Governors of the Federal Reserve System (U.S.), revised 04 Jun 2026.
    • Handle: RePEc:fip:fedgfe:2025-21
    DOI: 10.17016/FEDS.2025.021r1
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    1. Peter Ganong & Pascal Noel, 2019. "Consumer Spending during Unemployment: Positive and Normative Implications," American Economic Review, American Economic Association, vol. 109(7), pages 2383-2424, July.
    2. J. B. Taylor & Harald Uhlig (ed.), 2016. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 2, number 2.
    3. Carroll Christopher Dixon, 2001. "Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-38, April.
    4. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
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    Keywords

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    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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