Household Debt Overhang and Transmission of Monetary Policy

Sami Alpanda · Sarah Zubairy

131 citations0/0 files storedJournal of money credit and banking

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Monetary Policy and Economic Impact Housing Market and Economics Economic theories and models

Abstract

Abstract We investigate how the level of household indebtedness affects the monetary transmission mechanism in the U.S. economy. Using state‐dependent local projection methods, we find that the effects of monetary policy are less powerful during periods of high household debt. In particular, the impact of monetary policy shocks is smaller on GDP, consumption, residential investment, house prices, and household debt during a high‐debt state. We then build a partial equilibrium model of borrower households with financial constraints to rationalize these facts. The model points to the weakening of the home equity loan channel as a possible reason for the decline in monetary policy effectiveness when initial debt levels are high.

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References

1977Determinants of corporate borrowing 1997Postwar U.S. Business Cycles: An Empirical Investigation 1997Credit Cycles 2005Estimation and Inference of Impulse Responses by Local Projections 1998The Financial Accelerator in a Quantitative Business Cycle Framework 1988Agency Costs, Net Worth, And Business Fluctuations 1999Chapter 21 The financial accelerator in a quantitative business cycle framework 1999Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series

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