DP11023 Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism

Author(s): James Cloyne, Clodomiro Ferreira, Paolo Surico
Publication Date: December 2015
Keyword(s):
JEL(s): E21, E32, E52
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11023

In response to an interest rate change, mortgagors in the U.K. and U.S. 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 U.K. than in the U.S., 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 cashflows.