Monetary Policy Transmission and Household Indebtedness in Australia*

Khuderchuluun Batsukh, Nicolas Groshenny () and Naveed Javed ()
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Khuderchuluun Batsukh: Adelaide University
Nicolas Groshenny: GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, UM - Le Mans Université, Centre for Applied Macroeconomic Analysis (CAMA)
Naveed Javed: Reserve Bank of New Zealand

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Abstract: We highlight the importance of high and low states of household indebtedness for the transmission of monetary policy in Australia over the period 1994Q1–2019Q3. Working with a state‐dependent local projection model, we find that the dynamic effects of monetary policy shocks depend on household‐debt conditions: In the low debt state, output, investment, house prices and the household debt‐to‐GDP ratio strongly react to monetary policy shocks, while the responses of these variables are muted in the high‐debt state. Simulations from a stylised theoretical model show that high indebtedness triggers binding collateral constraints that shut off the home equity loan channel, thereby attenuating the consumption response to an interest rate shock. Our results suggest that (i) the home equity channel is active when household debt is moderate, but inactive when debt is high and (ii) this channel played a key role in the transmission of monetary policy in Australia over the sample period, potentially accounting for the diminished effectiveness of monetary policy under high household debt conditions.

Keywords: Monetary policy; Australian economy; Household indebtedness (search for similar items in EconPapers)
Date: 2026-08-04
Note: View the original document on HAL open archive server: https://hal.science/hal-05723992v1
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Published in Economic Record, 2026, ⟨10.1111/1475-4932.70064⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05723992

DOI: 10.1111/1475-4932.70064

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