Household Indebtedness and the Consumption Channel of Monetary Policy: Evidence from China

Abstract

This paper studies the impact of household indebtedness on the consumption channel of monetary policy using the Chinese household-level survey data. We employ a panel smooth transition regression model to investigate the non-linear role of indebtedness. We find that housing-related indebtedness weakens the monetary policy transmission, and this effect is non-linear as there is a much larger counteraction of consumption in response to monetary policy shocks when household indebtedness increases from a low level rather than from a high level. Moreover, the weakened monetary policy transmission from indebtedness is stronger in urban households than in rural households. This can be explained by the investment good characteristic of houses in China.