Inequality, Monetary Policy and Aggregate Demand
Saturday, Jan. 7, 2017 1:00 PM – 3:00 PM
- Chair: Kurt Mitman, IIES-Stockhom University
Monetary Policy, Heterogeneity and the Housing Channel
AbstractAbstract We investigate the role of housing and mortgage debt in the transmission and effectiveness of monetary policy. First, monetary policy induced-movements in house prices translate into consumption changes because of wealth effects. Second, a contractionary monetary shock raises the cost of borrowing which reduces the demand and as a result the liquidity of the housing market, further depressing house prices and further increases the cost of borrowing. Furthermore, nominal long-term mortgage debt implies that changes in monetary policy result in redistribution between lenders and borrowers and generate cash-flow effects that are larger for borrowing constrained households. We build a heterogenous agent New Keynesian model with a frictional housing market to quantify the various mechanisms. The model is able to match the rich empirical heterogeneity in home ownership, leverage and MPC across households. In particular, our model is consistent with the significant difference in MPC between low- and high-LTV households that we document in the data. Our quantitative findings are as follows: First, we find that about 20% of the drop in aggregate consumption against a contractionary monetary shock is due to declining house prices. Second, we find asymmetric responses of the economy to shocks, with contractionary shocks yielding a larger response of all variables. Finally, we investigate how the transmission of monetary policy depends on the distribution of mortgage debt and find that monetary policy is more effective in stimulating the economy in an high-LTV environment.
Household Debt and Monetary Policy: Revealing the Cash-Flow Channel
AbstractWe examine the cash-flow channel of monetary policy, i.e. the effect of monetary policy on spending when households hold debt linked to short-term rates such as adjustable rate mortages (ARMs). Using registry-based data on Swedish households, we estimate substantial responses to a change in the monetary policy rate depending on homeowners' debt-to-income ratio and depending whether homeowners hold ARMs or FRMs. Our findings imply that monetary policy will have a stronger effect on real economic activity when households are highly indebted and have ARMs. For homeowners with a debt-to-income ratio exceeding 2 and who hold ARMs, the response is equivalent to a marginal propensity to consume of 0.5 out of interest expenses.
Monetary Policy When Households Have Debt: New Evidence on the Transmission Mechanism
AbstractThis paper offers a new perspective on the transmission of monetary pol- icy using household micro-data for the U.S. and U.K.. Following a temporary cut in interest rates, households with mortgage debt increase their spending significantly, home-owners without debt do not adjust expenditure at all and renters increase spending but by less than mortgagors. Income, however, rises considerably for all households. We show that the balance sheets of these hous- ing tenure groups differ markedly in their composition of liquid versus illiquid wealth and this heterogeneity in liquidity holdings, together with a sizable general equilibrium effect on income, is crucial for explaining our results. In contrast, differences in demographics, the elasticity of intertemporal substi- tution, wealth effects and the response of mortgage and rental payments are unable to account for the heterogeneity in expenditure we document.
- D0 - General