DP12270 Household Debt and Monetary Policy: Revealing the Cash-Flow Channel

Author(s): Martin Flodén, Matilda Kilström, Josef Sigurdsson, Roine Vestman
Publication Date: September 2017
Keyword(s): adjustable rate mortgages, Consumption, Household Debt, monetary policy, variable interest rates
JEL(s): D14, E21, E52, G11
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12270

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.