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

Author(s): Martin Flodén, Matilda Kilström, Josef Sigurdsson and Roine Vestman

Publication Date: September 2017

Keyword(s): adjustable rate mortgages, Consumption, Household Debt, monetary policy and variable interest rates

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We examine the cash-flow channel of monetary policy, i.e. the effect of monetary policy on spending when households hold debt linked to short-term rates such as adjustable rate mortgages (ARMs). Using registry-based data on Swedish households, we estimate substantial heterogeneity in consumption responses to a change in monetary policy through the cash-flow channel. Our findings imply that monetary policy has a stronger effect on real economic activity when households are highly indebted and have ARMs. For homeowners with a debt-to-income ratio of around 3 and ARMs, the estimated response is equivalent to a marginal propensity to consume of 0.5.

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Bibliographic Reference

Flodén, M, Kilström, M, Sigurdsson, J and Vestman, R. 2017. 'Household Debt and Monetary Policy: Revealing the Cash-Flow Channel'. London, Centre for Economic Policy Research. https://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12270