The role of households' borrowing constraints in the transmission of monetary policy

Fergus Cumming , Paul Hubert (1)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)

This paper investigates how the transmission of monetary policy to the real economy depends on the distribution of household debt. Using an original loan-level dataset covering the universe of UK mortgages, we assess the effect of monetary shocks on aggregate consumption by exploiting time variation in a measure of the proportion of households close to their borrowing constraint. We find that monetary policy is most potent when there is a large share of constrained households. In contrast, we find noevidence that the average level of borrowing relative-to-income of the household sector affects the transmission of monetary policy.

Keywords: Heterogeneity; Distribution; Mortgage debt; State-dependence

Domains: Humanities and Social Sciences; Economics and Finance

Fergus Cumming, Paul Hubert. The role of households' borrowing constraints in the transmission of monetary policy. 2019. ⟨hal-03403257⟩