Monetary policy when households have debt : new evidence on the transmission mechanism
Subject
Economics
Publishing details
Bank of England Working Papers
Authors / Editors
Cloyne J; Ferreira C; Surico P
Biographies
Publication Year
2016
Abstract
In response to an interest rate change, mortgagors in the United Kingdom and United States 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 United Kingdom than in the United States, 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 cash flows.
Keywords
Monetary policy; Mortgage debt; Liquidity constraints
Series Number
589
Series
Bank of England Working Papers