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Transmission of Monetary Policy in Times of High Household Debt

Author

Listed:
  • Youngju Kim

    (Macroeconomics Team, Economic Research Institute, The Bank of Korea)

  • Hyunjoon Lim

    (International Economics Team, Economic Research Institute, The Bank of Korea)

Abstract

This paper explores whether the effectiveness of monetary policy can be affected by the degree of household indebtedness. We take an interacted panel VAR approach using a panel of 28 countries and thereby obtain several interesting findings. That is, the responses of consumption and investment to monetary shocks are stronger in the state of high household debts. Such responses furthermore become larger in a contractionary monetary policy stance rather than in an expansionary one. Finally, we find that the negative impact of contractionary monetary shocks on the real economy is stronger in the countries with a higher share of adjustable rate loans. We conjecture that these findings lend support for the presence of "cash flow channel" with respect to the transmission of contractionary monetary policy.

Suggested Citation

  • Youngju Kim & Hyunjoon Lim, 2017. "Transmission of Monetary Policy in Times of High Household Debt," Working Papers 2017-35, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1735
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Household debt; Monetary policy; Interacted panel VAR; Adjustable-rate loans;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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