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Monetary policy when households have debt : new evidence on the transmission mechanism



Publishing details

Bank of England Working Papers

Authors / Editors

Cloyne J;Ferreira C;Surico P


Publication Year



In response to an interest rate change, mortgagors in the United Kingdom and United States adjust their spending significantly (especially on durable goods) but outright home-owners do not. While the dollar change in mortgage payments is nearly three times larger in the United Kingdom than in the United States, these magnitudes are much smaller than the overall change in expenditure. In contrast, the income change is sizable and similar across both household groups and countries. Consistent with the predictions of a simple heterogeneous agents model with credit-constrained households and multi-period fixed-rate debt contracts, our evidence suggests that the general equilibrium effect of monetary policy on income is quantitatively more important than the direct effect on cash flows.


Monetary policy; Mortgage debt; Liquidity constraints

Series Number



Bank of England Working Papers

Available on ECCH


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