Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism
By J. Cloyne, Clodomiro Ferreira, P. Surico. The Review of Economic Studies, 2019
300 citations recorded by the source corpus.
Using household survey data for the U.S. and the U.K., we show that the aggregate response of consumption to interest rate changes is driven by households with a mortgage. Outright home-owners do not adjust expenditure at all while renters change their spending but by less than mortgagors. Income rises for all households as interest rate cuts directly affect firm investment and household consumption, boosting aggregate demand. A crucial difference between the housing tenure groups is the composition of their balance sheets: mortgagors hold sizable illiquid assets but little liquid wealth. Our results reveal that general equilibrium effects on household income coupled with balance-sheet-driven heterogeneity in the marginal propensity to consume play a key role in the transmission of monetary policy.
Subfields: Accounting, Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/7416def6254a494ba146989c5e8f6feb4bea198b
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Citations in the corpus
- CENTRAL BANK POLICIES AND INCOME AND WEALTH INEQUALITY: A SURVEY (2019, unknown): “This is found for the UK, the USA (Cloyne et al., 2016), and Japan before the 2000s (Inui et al., 2017). Inui et al. (2017) argue that this could be due to labor market rigidities and nominal wage stickiness, which lead to a structural dispersion of wages across workers and result in rising earnings”
- MPC Heterogeneity and Household Balance Sheets (2016, unknown): “Instead, it points toward extensions emphasized in the more recent literature (De Nardi, 2004 and De Nardi and Fella, 2017): a realistic earnings profile coupled with borrowing constraints will tend to generate high MPCs early in life, while luxury bequest motives might explain low MPCs late in life”
- Microeconomic Heterogeneity and Macroeconomic Shocks (2018, unknown): “A number of studies reveal that both the sign and size of the effect of changes in interest rates on consumption depend on households’ net asset positions (Flodén et al., 2016; Cloyne et al., 2017).”
- Transmission of Monetary Policy with Heterogeneity in Household Portfolios (2018, background): “(2012), Ravn and Sterk (2013), Den Haan et al. (2014), Auclert (2015), Bayer et al.”