Household Debt Overhang and Transmission of Monetary Policy

Keywords

E21; E32; E52; home equity loans; household debt; monetary policy

Abstract

We investigate how the level of household indebtedness affects the monetary transmission mechanism in the U.S. economy. Using state-dependent local projection methods, we find that the effects of monetary policy are less powerful during periods of high household debt. In particular, the impact of monetary policy shocks is smaller on GDP, consumption, residential investment, house prices, and household debt during a high-debt state. We then build a partial equilibrium model of borrower households with financial constraints to rationalize these facts. The model points to the weakening of the home equity loan channel as a possible reason for the decline in monetary policy effectiveness when initial debt levels are high.

Publication Date

8-1-2019

Publication Title

Journal of Money, Credit and Banking

Volume

51

Issue

5

Number of Pages

1265-1307

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1111/jmcb.12548

Socpus ID

85053285202 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/85053285202

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