DP18214 Fisher Dynamics, Monetary Policy, and Household Indebtedness
Growth in household debt-to-income ratios can be attributed to nominal debt changes or “Fisher dynamics” due to interest income and expenses, real income growth, and inflation. With microdata covering the universe of Norwegian households for more than 20 years, we decompose the importance of these channels for how debt-to-income ratios evolve over time and respond to monetary policy shocks. On average, debt changes outsize Fisher dynamics, but among highly leveraged households Fisher dynamics dominate. After interest rate hikes, debt changes and Fisher dynamics pull in opposite directions, with the former dominating, leading to a decline in debt-to-income ratios. This pattern is consistent across sub-groups, including highly indebted households, recent movers, households facing liquidity constraints, and households facing high unemployment risk.
