'How do interest rates affect consumption? Household debt and the role of asset prices' by Angus Folie (Bank of England)

About Angus Folie (Bank of England)

Abstract:

This paper estimates how rate cuts increase consumption, via debt and asset prices. Using administrative UK data on mortgages and consumption, we exploit the expiry of fixed-rate mortgages to construct six million household-level natural experiments. A 1 percentage point reduction in mortgage rates raises consumption by 3% in the following six months. Using plausibly exogenous variation in how house prices respond to rate cuts, we show that consumption increases mostly because households borrow against higher house prices; lower debt service after rate cuts matters less. These results suggest that in large part, monetary policy affects consumption through asset prices and borrowing.