Abstract

We investigate why the effect of monetary policy on aggregate consumption depends on the distribution of household indebtedness. Using UK loan-level micro-data, we identify the fraction of households with a limited ability to smooth consumption and find that the heterogeneous impact of monetary policy on consumption depends on house price dynamics and the share of highly-indebted households. Consumption responds strongly to monetary policy when the share of highly-indebted households is large and house prices have recently decreased, but we find no effect after periods of house price growth. Our results highlight the role of household heterogeneity and the refinancing channel in the transmission of monetary policy.

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