Household Debt and Monetary Policy: Revealing the Cash-Flow Channel

Martin Flodén, Matilda Kilström, Jósef Sigurdsson and Roine Vestman

The Economic Journal, 2021, vol. 131, issue 636, 1742-1771

Abstract: We examine the effect of monetary policy on household spending when households are indebted and interest rates on outstanding loans are linked to short-term interest rates. Using administrative data on balance sheets and consumption expenditure of Swedish households, we reveal the cash-flow transmission channel of monetary policy. On average, indebted households reduce consumption spending by an additional 0.23–0.55 percentage points in response to a one-percentage-point increase in the policy rate, relative to a household with no debt. We show that these responses are driven by households that have some or a large share of their debt in contracts where interest rates vary with short-term interest rates, such as adjustable-rate mortgages (ARMs), which implies that monetary policy shocks are quickly passed through to interest expenses.

Date: 2021
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Related works:
Working Paper: Household Debt and Monetary Policy: Revealing the Cash-Flow Channel (2017)
Working Paper: Household Debt and Monetary Policy: Revealing the Cash-Flow Channel (2017)
Working Paper: Household Debt and Monetary Policy: Revealing the Cash-Flow Channel (2016)
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