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Household Debt and Monetary Policy: Revealing the Cash-Flow Channel

Author

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  • Floden, Martin
  • Kilström, Matilda
  • Sigurdsson, Jósef
  • Vestman, Roine
Abstract
We examine the effect of monetary policy on household spending when households are indebted and interest rates on outstanding loans are linked to short-term interest rates. Using administrative data on balance sheets and consumption expenditure of Swedish households, we reveal the cash-flow transmission channel of monetary policy. On average, indebted households reduce consumption spending by an additional 0.25-0.35 percentage points in response to a one-percentage-point increase in the policy rate, relative to a household with no debt. This is true among households with low or high levels of illiquid wealth, such as homeowners, who hold disproportionally little liquid wealth and display hand-to-mouth behavior when faced with increased interest expenses. We show that these responses are driven by households that have some or a large share of their debt in contracts where interest rates vary with short-term interest rates, such as adjustable-rate mortgages (ARMs), which implies that monetary policy shocks are quickly passed through to interest expenses.

Suggested Citation

  • Floden, Martin & Kilström, Matilda & Sigurdsson, Jósef & Vestman, Roine, 2017. "Household Debt and Monetary Policy: Revealing the Cash-Flow Channel," CEPR Discussion Papers 12270, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12270
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    More about this item

    Keywords

    Monetary policy; Consumption; Household debt; Adjustable rate mortgages;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • 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
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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