A seminar entitled "Household Debt and Monetary Policy: Revealing the Income Channel" will be held in the meeting room Sölvhóll in the Central Bank of Iceland on Tuesday 19 May 2015 at 15:00. 

Presenter is Jósef Sigurðsson, PhD student at Stockholm University.

Summary:

We reveal an important transmission channel of monetary policy: the income channel. For

households that hold debt with adjustable interest rates, monetary policy will have a direct

and immediate effect on their interest rate expenses and therefore their disposable income. If

households are borrowing constrained and unable to smooth consumption, they will respond

by adjusting their spending. Using administrative microdata for Sweden – a country with high

prevalence of mortgages with adjustable interest rates – we estimate household consumption

responses to monetary policy. We test whether consumption among households which are

more likely to be borrowing constrained is more responsive to monetary policy. We find that

households with higher levels of Loan-to-Income – a measure of the likelihood of being borrowing

constrained – reduce consumption more when faced with unanticipated increases in

interest expenses. These results suggest that monetary policy can have heterogeneous effects

on consumption across households via the income channel.