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Household indebtedness, financial frictions and the transmission of monetary policy to consumption: Evidence from China

Michael Funke, Xiang Li and Doudou Zhong

Emerging Markets Review, 2023, vol. 55, issue C

Abstract: This paper studies the impact of household indebtedness on the transmission of monetary policy to consumption using the Chinese household-level survey data. We employ a panel smooth transition regression model to investigate the non-linear role of indebtedness. We find that housing-related indebtedness weakens the monetary policy transmission, and this effect is non-linear as there is a much larger counteraction of consumption in response to monetary policy shocks when household indebtedness increases from a low level rather than from a high level. Moreover, the weakened monetary policy transmission from indebtedness is stronger in urban households than in rural households. This can be explained by the investment good characteristic of real estate in China.

Keywords: Consumption; Household debt; Monetary policy; Panel smooth transition regression; China (search for similar items in EconPapers)
JEL-codes: C23 E21 E52 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.ememar.2022.100974

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