A recent literature analyzes how households are directly impacted by monetary policy when they hold mortgages with adjustable interest rates, highlighting the income or cash-flow channels of monetary policy. We add to this literature by examining how individuals' spending, saving, and borrowing is affected by monetary policy via variable interest on consumer credit, using very comprehensive panel data from personal finance management software. To deal with endogeneity concerns, we utilize a time series of unexpected monetary policy shocks and individual-level variation as short-term interest rate changes impact individuals differentially when they hold more consumer debt, on credit cards or as overdrafts. Beyond documenting how individuals' spending is affected by changes in their interest rates on consumer credit, we examine how individuals adjust their consumer credit positions. We highlight the role of consumer credit in transmitting the effects of monetary policy in contrast to the existing literature focusing on adjustable-rate mortgages for three reasons. First, in the US, outstanding credit-card debt with variable interest rates is quantitatively more important than adjustable-rate mortgages (which constitute only 2 percent of all mortgage applications currently). Second, holders of adjustable-rate mortgages may not be representative for the overall population. Third, mortgage rates are priced off 10-year Treasury bonds and are thus not only influenced by short-term rates but also the outlook for inflation and long-term economic growth in the US and abroad. In contrast, changes in short-term interest are directly reflected in credit-card interest within one monthly cycle.
Olafsson, Arna and Michaela Pagel. "Monetary Policy Pass-Through to Spending via Consumer Credit." Columbia Business School, 2018.
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