Monetary Policy When Households Have Debt: New Evidence on The Transmission Mechanism

with James Cloyne (UC Davis) and Paolo Surico (LBS)

Review of Economic Studies, Volume 87(1), 102-129, January 2020

[Link to Journal publication]

Previous version: Bank of Spain DT1813. Media: VoxEU column 

Abstract: Using household survey data for the U.S. and the U.K., we show that the aggregate response of consumption to interest rate changes is driven by households with a mortgage. Outright home-owners do not adjust expenditure at all while renters change their spending but by less than mortgagors. Income rises for all households as interest rate cuts directly affect firm investment and household consumption, boosting aggregate demand. A crucial difference between the housing tenure groups is the composition of their balance sheets: mortgagors hold sizable illiquid assets but little liquid wealth. Our results reveal that general equilibrium effects on household income coupled with balance-sheet-driven heterogeneity in the marginal propensity to consume play a key role in the transmission of monetary policy.

Working Papers

Monetary Policy, External Finance and Investment  [December 2020]  [Submitted]

with James Cloyne (UC Davis), Maren Froemel (Bank of Englandand Paolo Surico (LBS)

Other versions: NBER wp 25366  and  Bank of Spain DT1911

Abstract: In response to a change in interest rates, younger firms not paying dividends adjust both their capital expenditure and borrowing significantly more than older firms paying dividends. The reason is that the debt of younger non-dividend payers is far more sensitive to fluctuations in collateral values, which are significantly affected by monetary policy. The results are robust to a wide range of possible confounding factors. Other channels, including movements in interest payments, product demand, profitability and mark-ups, are also significant but seem unlikely to explain the heterogeneity in the response of capital expenditure. Our findings suggest that financial frictions play a significant role in the transmission of monetary policy to investment.

Work in Progress

Housing Tenure and Household Debt: Life-Cycle Dynamics During a Boom and Bust   [Draft coming soon!]

with Julio Gálvez (Bank of Spain) and Myroslav Pidkuyko (Bank of Spain)

Some results using Spanish data can be found in Ocasional Documents no. 2013 - Recuadro 2 - Bank of Spain (in spanish)

Bank Lending Channel and the Aggregate Effects of Sovereing Liquidity Shocks 

with Andrea Gazzani (Banca d'Italia) and Alejandro Vicondoa (PUC Chile)

Helicopter Money Drop: The Role of Expectations

with Hernán Seoane (U. Carlos III)

Frozen Stuff

Democratic Monetary Policy Rules [2019]

with J. Fernández-Villaverde (UPenn), J. Gálvez (Bank of Spain), S. Hurtado (Bank of Spain) and G. Nuño (Bank of Spain)

Variance-Covariance Estimation with Spatial and Serial Correlation: IV in an Un-Balance Panel  (2018) [Draft coming soon]

Firms Strategic Competition and The Dynamics of Reputation: The Case of an On-line Market  [2015] 

with Ema Iancu (



Who Pays for Inflation? Welfare Costs of Inflation With heterogeneous Households  (based on my master thesis at CEMFI)  [2012]

Assigned To Your Choice? A Short Note on Matching Researchers to Workspaces  [2010]

Recent Discussions

"Optimal Monetary Policy in HANK Economies" 

by S. Acharya, E. Challe and K. Dogra   

BdF-CEPR Heterogeneous Agents or Heterogeneous Information (December 2019)


"Banking Supervision, Monetary Policy and Risk Taking: Big Data Evidence from 15 Credit Registers" 

by C. Altavilla, M. Boucinha, J.L Peydró and F. Smets  

ESSIM (May 2019) 


"Sovereign Default in a Monetary Union"

by Sergio de Ferra and Federica Romei 

12th Nordic Summer Symposium in Macro (August 2018)


"Housing Market Freezes, Deleveraging and Aggregate Demand" 

by Christian Bayer and Ralph Luetticke  

Housing, Housing Credit and the Macroeconomy (September 2017)


Policy Articles (publicly available)

Documentos Ocasionales no. 2013 - Banco de España. June 2020 

Research features. Banco de España. Fall 2019

Informe Trimestral - Banco de España.  September 2018