Monetary policy when households have debt: new evidence on the transmission mechanism

Cloyne, J, Ferreira, C and Surico, P (2020) Monetary policy when households have debt: new evidence on the transmission mechanism. Review of Economic Studies, 87 (1). pp. 102-129. ISSN 0034-6527


This paper offers a new perspective on the transmission of monetary policy using household 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 housing tenure groups differ markedly in their composition of liquid versus illiquid wealth. 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 substitution, wealth effects and the response of mortgage and rental payments are unable to account for the heterogeneity in expenditure we document.

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Item Type: Article
Subject Areas: Economics
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© 2019 Oxford University Press. This is a pre-copyedited, author-produced version of an article accepted for publication in The Review of Economic Studies following peer review. The version of record: James Cloyne, Clodomiro Ferreira, Paolo Surico, Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism, The Review of Economic Studies, rdy074 is available online at: and at:

Funder Name: European Research Council, European Research Council, British Academy
Subjects: P > Personal finance
M > Monetary economics
Date Deposited: 17 Dec 2018 12:25
Last Modified: 18 Mar 2020 02:25

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