How Does Monetary Policy Affect Household Indebtedness?

Andreas Fagereng, Magnus A. H. Gulbrandsen (), Martin Holm and Gisle Natvik

No 05/2023, Working Papers from Centre for Household Finance and Macroeconomic Research (HOFIMAR), BI Norwegian Business School

Abstract: Growth in household debt-to-income ratios can be attributed to nominal debt changes or mechanical Fisher effects from interest income and expenses, real income growth, and inflation. With microdata covering the universe of Norwegian households for more than 20 years, we decompose the importance of these channels for how debt-toincome ratios evolve over time and respond to monetary policy shocks. On average, debt changes outsize Fisher effects, and they are due to households who move. But among highly leveraged households, Fisher effects dominate. After interest rate hikes, debt changes and Fisher effects pull in opposite directions. The former dominate so that debt-to-income ratios fall. This pattern holds across sub-groups, even among highly indebted households. Hence, changes in borrowing and repayment dominate mechanical effects via nominal income growth in the transmission of monetary policy shocks to debt-to-income ratios.

Keywords: Household Debt; Monetary Policy (search for similar items in EconPapers)
Pages: 29 pages
Date: 2023
New Economics Papers: this item is included in nep-cba and nep-mon
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https://hdl.handle.net/11250/3124934

Related works:
Working Paper: How does monetary policy affect household indebtedness? (2021)
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