Transmission of Monetary Policy in Times of High Household Debt

Youngju Kim () and Hyunjoon Lim ()
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Youngju Kim: Macroeconomics Team, Economic Research Institute, The Bank of Korea
Hyunjoon Lim: International Economics Team, Economic Research Institute, The Bank of Korea

No 2017-35, Working Papers from Economic Research Institute, Bank of Korea

Abstract: This paper explores whether the effectiveness of monetary policy can be affected by the degree of household indebtedness. We take an interacted panel VAR approach using a panel of 28 countries and thereby obtain several interesting findings. That is, the responses of consumption and investment to monetary shocks are stronger in the state of high household debts. Such responses furthermore become larger in a contractionary monetary policy stance rather than in an expansionary one. Finally, we find that the negative impact of contractionary monetary shocks on the real economy is stronger in the countries with a higher share of adjustable rate loans. We conjecture that these findings lend support for the presence of "cash flow channel" with respect to the transmission of contractionary monetary policy.

Keywords: Household debt; Monetary policy; Interacted panel VAR; Adjustable-rate loans (search for similar items in EconPapers)
JEL-codes: E52 E62 R38 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2017-12-29
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2017-35.pdf Working Paper, 2017 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:bok:wpaper:1735

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