Seminar on Household Debt and Monetary Policy: Revealing the Income Channel

A seminar on this topic will be held in Sölvhóll, a seminar room in the Central Bank of Iceland, Tuesday May 19 at 11:00 am. The presenter will be Jósef Sigurðsson, a Ph.D. student at the University of Stockholm and former employee of the Central Bank of Iceland.


We reveal an important transmission channel of monetary policy: the income channel. For households that hold debt with adjustable interest rates, monetary policy will have a direct and immediate effect on their interest rate expenses and therefore their disposable income. If households are borrowing-constrained and unable to smooth consumption, they will respond by adjusting their spending. Using administrative microdata for Sweden – a country with high prevalence of adjustable-rate mortgages – we estimate household consumption responses to monetary policy. We test whether consumption among households that are more likely to be borrowing-constrained is more responsive to monetary policy. We find that households with higher loan-to-income levels – a measure of the likelihood of being borrowing-constrained – reduce consumption more when faced with unanticipated increases in interest expense. The results suggest that monetary policy can have heterogeneous effects on consumption across households via the income channel.