Household Heterogeneity and the Lending Channel of Monetary Policy

Sumit Agarwal, Sergio Mayordomo, María Rodríguez-Moreno and Emanuele Tarantino
Additional contact information
Sumit Agarwal: NUS
Sergio Mayordomo: BANCO DE ESPAÑA
María Rodríguez-Moreno: BANCO DE ESPAÑA
Emanuele Tarantino: LUISS, EIEF, CEPR, AND EUROPEAN COMMISSION

No 2524, Working Papers from Banco de España

Abstract: This paper examines how monetary policy affects corporate lending through its impact on household balance sheets, bridging the gap between the cash flow and bank lending channels. When policy rates rise, households with variable-rate debt face higher monthly payments, prompting early mortgage repayments, particularly among high-income borrowers. Exploiting the monetary tightening between July 2022 and September 2023 as a policy experiment, we show that banks that are more exposed to variable-rate mortgages granted to higher-income households increase their supply of corporate credit, especially to micro and small firms. However, no variation is observed in the balance of household credit or in other investment items on the banks’ balance sheets. Indeed, banks facing higher liquidity constraints tend to extend more corporate credit as their exposure to early redemptions increases. Our findings provide new evidence on how household financial constraints shape monetary policy transmission, offering novel insights into the interplay between household debt dynamics and corporate credit allocation.

Keywords: floating-rate mortgages; early redemption; monetary policy tightening; monetary policy transmission; corporate lending; bank liquidity (search for similar items in EconPapers)
JEL-codes: D14 E43 E52 G21 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2025-05
New Economics Papers: this item is included in nep-eec and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2524

DOI: 10.53479/39825

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