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

Martin Flodén, Kilström, Matilda, Sigurdsson, Jósef and Roine Vestman

No 12270, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 0.25-0.35 percentage points in response to a one-percentage-point increase in the policy rate, relative to a household with no debt. This is true among households with low or high levels of illiquid wealth, such as homeowners, who hold disproportionally little liquid wealth and display hand-to-mouth behavior when faced with increased interest expenses. 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.

Keywords: Monetary policy; Consumption; Household debt; Adjustable rate mortgages (search for similar items in EconPapers)
JEL-codes: D14 E21 E52 G11 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
https://cepr.org/publications/DP12270 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Household Debt and Monetary Policy: Revealing the Cash-Flow Channel (2021)
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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:12270

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP12270

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().