Series: Working Papers. 1813.
Author: James Cloyne, Clodomiro Ferreira and Paolo Surico.
Topics: Household finances | Central Balance Sheet Data Office | Monetary policy | International Economy | Quantitative methods.
Published in: Review of Economic Studies 
Full document
Abstract
How do changes in monetary policy affect consumption? Using household data for the US
and the UK, we show that most of the aggregate response of consumption to interest rates
is driven by households with a mortgage. Outright home owners do not adjust expenditure
at all and renters change their spending but by less than mortgagors. Income rises for all
households as interest rate cuts directly affect firm investment and household consumption,
boosting aggregate demand. A key dierence between these housing tenure groups is the
composition of their balance sheets: mortgagors hold sizable illiquid assets but little liquid
wealth, consistent with a higher marginal propensity to consume.