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

James Cloyne (), Clodomiro Ferreira () and Paolo Surico ()
Additional contact information
Clodomiro Ferreira: London Business School

No 589, Bank of England working papers from Bank of England

Abstract: In response to an interest rate change, mortgagors in the United Kingdom and United States adjust their spending significantly (especially on durable goods) but outright home-owners do not. While the dollar change in mortgage payments is nearly three times larger in the United Kingdom than in the United States, these magnitudes are much smaller than the overall change in expenditure. In contrast, the income change is sizable and similar across both household groups and countries. Consistent with the predictions of a simple heterogeneous agents model with credit-constrained households and multi-period fixed-rate debt contracts, our evidence suggests that the general equilibrium effect of monetary policy on income is quantitatively more important than the direct effect on cash flows.

Keywords: Monetary policy; mortgage debt; 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-mon
Date: 2016-04-08
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Related works:
Working Paper: Monetary policy when households have debt: new evidence on the transmission mechanism (2018) Downloads
Working Paper: Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism (2015) Downloads
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