Title: Debt overhang and monetary policy transmission: An international perspective
Authors: Eleonora Granziera - Bank of Finland (Finland) [presenting]
Abstract: The aim is to investigate how the level of household indebtedness affects the monetary transmission mechanism in advanced economies, using state-dependent local projection methods. In particular, we explore whether the impact of monetary policy shocks on output, bank credit and other macroeconomic and financial variables are less pronounced during periods of high household debt, reminiscent of a debt overhang. We exploit the time-series variation within countries, as well as the cross-sectional variation across countries such as the prevalence of fixed- versus adjustable-rate mortgages, to investigate this issue. We then build a small-scale model, where households face collateral and debt-service constraints and are subject to income shocks, to rationalize these facts. The model points to the weakening of the home equity loan channel and increased debt aversion, especially during recessions, as a possible reason for the decline in monetary policy effectiveness when initial debt levels are high.