Jin Cao (Norges Bank) - Household Leverage and Monetary Policy Pass-Through

Co-authors: Chao Cui (Dongbei University of Finance and Economics), Valeriya Dinger (University of Osnabrück and the Leeds University Business School), Martin B. Holm (University of Oslo) and  Shulong Kang (Dongbei University of Finance and Economics)

This paper investigates how monetary expansion affects household consumption and savings through household debts. Using monetary policy cuts in China in the end of 2008 as an experiment, we find that the resulted increase in indebted households’ disposable income leads to increasing households’ savings and expenditure on non-durable goods, while the same effect is not observed on durables. We also find the stimulating effects of monetary expansion on consumption are mainly driven by high-income households, while low-income households choose to save more. Furthermore, we find that precautionary saving incentives are stronger for households with lower liquidity, lower education, higher job uncertainty, and/or less covered by social security.

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