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Monetary policy when households have debt: new evidence on the transmission mechanism

James Cloyne (), Clodomiro Ferreira () and Paolo Surico ()
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James Cloyne: University of California Davis, NBER and CEPR
Clodomiro Ferreira: Banco de España
Paolo Surico: London Business School and CEPR

No 1813, Working Papers from Banco de España, Working Papers Homepage

Abstract: How do changes in monetary policy affect consumption? Using household data for the US and the UK, we show that most of the aggregate response of consumption to interest rates is driven by households with a mortgage. Outright home owners do not adjust expenditure at all and renters change their spending but by less than mortgagors. Income rises for all households as interest rate cuts directly affect firm investment and household consumption, boosting aggregate demand. A key dierence between these housing tenure groups is the composition of their balance sheets: mortgagors hold sizable illiquid assets but little liquid wealth, consistent with a higher marginal propensity to consume.

Keywords: monetary policy; household balance sheets; liquidity constraints (search for similar items in EconPapers)
JEL-codes: E21 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-ure
Date: 2018-05
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