Does the debt service channel work?

Ling Jin
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Ling Jin: Inha University

No 2021-2, Inha University IBER Working Paper Series from Inha University, Institute of Business and Economic Research

Abstract: This paper studies whether the degree of interest rate adjustability can affect the heterogeneous effects of monetary policy. I use a dynamic panel model based on the GMM method with a panel of 16 countries, which leads to interesting findings. Overall, monetary policy easing decreased the household sector debt service ratio (DSR). Especially, monetary policy easing decreased the DSR in countries that mainly use ARMs (adjustable-rate mortgages). Conversely, the DSR increased in countries that mostly rely on FRMs (fixed-rate mortgages). Therefore, I find that monetary easing has the policy effect of decreasing household debt servicing burdens only in countries that mainly use ARMs. I also found that the DSR is increased during monetary policy easing in Korea, even though Korea is classified as ARM-dominated country. These results imply the inexistence of a household debt service channel of monetary easing in Korea.

Keywords: Monetary policy Transmission; Household debt; Adjustable-rate (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2021-01
New Economics Papers: this item is included in nep-cba and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:inh:wpaper:2021-2

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