Monetary Policy Pass-Through: House hold Consumption and Voluntary Deleveraging
Abstract:
Do households ben efit from expansionary monetary policy? We investigate how indebted househo lds’ consumption and saving decisions are affected by anticipated changes i n monthly interest payments. We focus on borrowers with adjustable rate mor tgages originated between 2005 and 2007 featuring an automatic reset of the interest rate after five years. The monthly payment due from the average b orrower falls by 52 percent ($900) upon reset, resulting in an increase in disposable income totaling tens of thousands of dollars over the remaining life of the mortgage. We uncover three patterns. First, the average househo ld increases monthly car purchases by 40 percent ($150) upon reset. Second, this expansionary effect is attenuated by the borrowers’ voluntary delever aging, as a significant fraction of the increased income is deployed to acc elerate debt repayment. Third, the marginal propensity to consume is signif icantly higher for low income borrowers and for those that had experienced a larger decline in housing wealth. To complement these household-level fin dings, we employ county-level data to provide evidence that consumption res ponded more to a reduction in short-term interest rates in counties with a larger fraction of adjustable rate mortgage debt. Our results shed light on the income channel of monetary policy as well as the role of debt rigidity in reducing the effectiveness of monetary policy.
DTSTAMP:20260408T062332Z DTSTART:20140929T173000Z DTEND:20140929T190000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR