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

The Economic journal (London), 2021-05, Vol.131 (636), p.1742-1771 [Peer Reviewed Journal]

The Author(s) 2020. Published by Oxford University Press on behalf of Royal Economic Society. 2020 ;ISSN: 0013-0133 ;ISSN: 1468-0297 ;EISSN: 1468-0297 ;DOI: 10.1093/ej/ueaa135

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  • Title:
    Household Debt and Monetary Policy: Revealing the Cash-Flow Channel
  • Author: Flodén, Martin ; Kilström, Matilda ; Sigurdsson, Jósef ; Vestman, Roine
  • Is Part Of: The Economic journal (London), 2021-05, Vol.131 (636), p.1742-1771
  • Description: 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 0.23–0.55 percentage points in response to a one-percentage-point increase in the policy rate, relative to a household with no debt. 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.
  • Publisher: Oxford University Press
  • Language: English
  • Identifier: ISSN: 0013-0133
    ISSN: 1468-0297
    EISSN: 1468-0297
    DOI: 10.1093/ej/ueaa135
  • Source: SWEPUB Freely available online
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