08 May 2015

Seminar "Household Debt and Monetary Policy: Revealing the Income Channel"

Coat of arms

Seminar on this topic will be held in Sölvhóll, the meeting room in the Central Bank, Tuesday May 19 at 11 am. The presenter in the seminar will be Jósef Sigurðsson, a Ph.D. student at the University of Stockholm.


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.