Working Paper: CEPR ID: DP14245
Authors: Jiri Slacalek; Oreste Tristani; Giovanni L. Violante
Abstract: This paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures. We analyze several transmission mechanisms operating through direct, partial equilibrium channels—intertemporal substitution and net interestrate exposure—and indirect, general equilibrium channels—net nominal exposure, as well as wealth, collateral and labor income channels. The strength of these forces varies across households depending on their marginal propensities to consume, their balance sheet composition,the sensitivity of their own earnings to fluctuations in aggregate labor income, and the responsiveness of aggregate earnings, asset prices and inflation to monetary policy shocks. We quantify all these channels in the euro area by combining micro data from the HFCS and the EU-LFS with structural VARs estimated on aggregate time series. We find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross-country heterogeneity in these responses.
Keywords: consumption; euro area; household balance sheets; marginal propensity to consume; monetary policy; wealth distribution
JEL Codes: D14; D31; E21; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy (E52) | Household consumption expenditures (D10) |
| Indirect labor income channel (J39) | Household consumption expenditures (D10) |
| Housing wealth effect (R21) | Household consumption expenditures (D10) |
| Monetary policy shocks (E39) | Aggregate employment and earnings (J39) |
| Aggregate employment and earnings (J39) | Household consumption expenditures (D10) |
| 100 basis point cut in interest rates (E43) | Household consumption expenditures for poor hand-to-mouth households (D12) |
| 100 basis point cut in interest rates (E43) | Household consumption expenditures for wealthy hand-to-mouth households (D12) |
| 100 basis point cut in interest rates (E43) | Household consumption expenditures for non-hand-to-mouth households (D12) |
| Indirect income and housing wealth/collateral channels (G59) | Increase in nondurable consumption (D12) |