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Asymmetric Effects of Interest Rate Changes: The Role of the Consumption-Wealth Channel

[journal article]

MacDonald, Garry; Mullineux, Andrew; Sensarma, Rudra

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Abstract Abstract This paper examines the role of the consumption-wealth channel in explaining asymmetric effects of monetary policy changes. Towards this end, we draw upon available literature on the consumption function and behavioural finance to construct a framework for asymmetric effects of monetary policy caused by the impact of wealth changes on aggregate consumption. We then employ data from the UK to examine the validity of the proposed framework. In the context of a liberalized economy with easy access to consumer credit, wealth reduction due to monetary tightening is expected to have weaker impact on spending than increase in wealth. Our results validate the above hypothesis.
Classification National Economy
Document language English
Publication Year 2009
Page/Pages p. 1991-2001
Journal Applied Economics (2009)
ISSN 1466-4283
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)