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Has Higher Household Indebtedness Weakened Monetary Policy Transmission?

Author

Listed:
  • Mr. Gaston Gelos
  • Mr. Tommaso Mancini-Griffoli
  • Mr. Machiko Narita
  • Federico Grinberg
  • Umang Rawat
  • Shujaat Khan

Abstract

Has monetary policy in advanced economies been less effective since the global financial crisis because of deteriorating household balance sheets? This paper examines the question using household data from the United States. It compares the responsiveness of household consumption to monetary policy shocks in the pre- and post-crisis periods, relating changes in monetary transmission to changes in household indebtedness and liquidity. The results show that the responsiveness of household consumption has diminished since the crisis. However, household balance sheets are not the culprit. Households with higher debt levels and lower shares of liquid assets are the most responsive to monetary policy, and the share of these households in the population grew. Other factors, such as economic uncertainty, appear to have played a bigger role in the decline of households’ responsiveness to monetary policy.

Suggested Citation

  • Mr. Gaston Gelos & Mr. Tommaso Mancini-Griffoli & Mr. Machiko Narita & Federico Grinberg & Umang Rawat & Shujaat Khan, 2019. "Has Higher Household Indebtedness Weakened Monetary Policy Transmission?," IMF Working Papers 2019/011, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2019/011
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    Cited by:

    1. Dániel Baksa & Zsuzsa Munkácsi, 2019. "More Gray, More Volatile? Aging and (Optimal) Monetary Policy," Bank of Lithuania Working Paper Series 67, Bank of Lithuania.
    2. Sigal Ribon, 2023. "Differential Effects of Monetary Policy on Household Consumption: The Case of Israel," Israel Economic Review, Bank of Israel, vol. 21(1), pages 35-73, March.
    3. Indrani Manna & Martin Suster & Biswajit Banerjee, 2022. "House Price Expectations, Household Indebtedness and Macroprudential Policy in Slovakia," Working and Discussion Papers WP 5/2022, Research Department, National Bank of Slovakia.
    4. Auer, Simone & Bernardini, Marco & Cecioni, Martina, 2021. "Corporate leverage and monetary policy effectiveness in the euro area," European Economic Review, Elsevier, vol. 140(C).
    5. Sun, Lixin, 2019. "China’s Debt Revisited," MPRA Paper 98796, University Library of Munich, Germany.
    6. Martin Harding & Mathias Klein, 2022. "Monetary policy and household net worth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 44, pages 125-151, April.
    7. Funke, Michael & Li, Xiang & Zhong, Doudou, 2023. "Household indebtedness, financial frictions and the transmission of monetary policy to consumption: Evidence from China," Emerging Markets Review, Elsevier, vol. 55(C).
    8. Mr. Adrian Alter & Elizabeth M. Mahoney, 2020. "Household Debt and House Prices-at-risk: A Tale of Two Countries," IMF Working Papers 2020/042, International Monetary Fund.

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    More about this item

    Keywords

    WP; monetary policy shock; basis point; Monetary policy; transmission; households; consumption; real estate; leverage; consumption growth; monetary policy transmission; monetary policy effectiveness; consumption response; monetary policy maker; Household consumption; Debt burden; Liquidity; Income; Global;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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