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Does the debt service channel work?

Author

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  • Ling Jin

    (Inha University)

Abstract

This paper studies whether the degree of interest rate adjustability can affect the heterogeneous effects of monetary policy. I use a dynamic panel model based on the GMM method with a panel of 16 countries, which leads to interesting findings. Overall, monetary policy easing decreased the household sector debt service ratio (DSR). Especially, monetary policy easing decreased the DSR in countries that mainly use ARMs (adjustable-rate mortgages). Conversely, the DSR increased in countries that mostly rely on FRMs (fixed-rate mortgages). Therefore, I find that monetary easing has the policy effect of decreasing household debt servicing burdens only in countries that mainly use ARMs. I also found that the DSR is increased during monetary policy easing in Korea, even though Korea is classified as ARM-dominated country. These results imply the inexistence of a household debt service channel of monetary easing in Korea.

Suggested Citation

  • Ling Jin, 2021. "Does the debt service channel work?," Inha University IBER Working Paper Series 2021-2, Inha University, Institute of Business and Economic Research.
    • Handle: RePEc:inh:wpaper:2021-2
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    More about this item

    Keywords

    Monetary policy Transmission; Household debt; Adjustable-rate;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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