Working Paper: CEPR ID: DP11023
Authors: James Cloyne; Clodomiro Ferreira; Paolo Surico
Abstract: In response to an interest rate change, mortgagors in the U.K. and U.S. adjust their spending significantly (especially on durable goods) but outright home-owners do not. While the dollar change in mortgage payments is nearly three times larger in the U.K. than in the U.S., these magnitudes are much smaller than the overall change in expenditure. In contrast, the income change is sizable and similar across both household groups and countries. Consistent with the predictions of a simple heterogeneous agents model with credit-constrained households and multi-period fixed-rate debt contracts, our evidence suggests that the general equilibrium effect of monetary policy on income is quantitatively more important than the direct effect on cashflows.
Keywords: monetary policy; mortgage debt; liquidity constraints
JEL Codes: E21; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy change (E52) | Household expenditure (mortgagors) (G51) |
| Monetary policy change (E52) | Household income (D19) |
| Household expenditure (mortgagors) (G51) | Durable goods expenditure (E20) |
| Household expenditure (mortgagors) (G51) | Nondurable goods and services expenditure (E20) |
| Dollar change in mortgage repayments (G21) | Household expenditure (mortgagors) (G51) |
| Liquidity constraint (E41) | Consumption behavior (mortgagors) (D12) |
| Household expenditure (mortgagors) (G51) | Aggregate impact of monetary policy (E19) |