Household Balance Sheet Channels of Monetary Policy: A Back of the Envelope Calculation for the Euro Area

45 Pages Posted: 13 Jan 2020 Last revised: 7 Apr 2023

See all articles by Jiri Slacalek

Jiri Slacalek

European Central Bank (ECB)

Oreste Tristani

European Central Bank (ECB)

Giovanni Violante

Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: January 2020

Abstract

This paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures. We analyze several transmission mechanisms operating through direct, partial equilibrium channels—intertemporal substitution and net interest rate exposure—and indirect, general equilibrium channels—net nominal exposure, as well as wealth, collateral and labor income channels. The strength of these forces varies across households depending on their marginal propensities to consume, their balance sheet composition, the sensitivity of their own earnings to fluctuations in aggregate labor income, and the responsiveness of aggregate earnings, asset prices and inflation to monetary policy shocks. We quantify all these channels in the euro area by combining micro data from the HFCS and the EU-LFS with structural VARs estimated on aggregate time series. We find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross-country heterogeneity in these responses.

Suggested Citation

Slacalek, Jiri and Tristani, Oreste and Violante, Giovanni, Household Balance Sheet Channels of Monetary Policy: A Back of the Envelope Calculation for the Euro Area (January 2020). NBER Working Paper No. w26630, Available at SSRN: https://ssrn.com/abstract=3518243

Jiri Slacalek (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Oreste Tristani

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

Giovanni Violante

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

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