Wednesday, January 17, 2018

Repetition helps

Household debt: recent developments and challenges (PDF) by Anna Zabai of BIS.

From the abstract:
In a high-debt economy, interest rate hikes could be more contractionary than cuts are expansionary.

From the main text:
Monetary policy is likely to have asymmetrical effects in a high-debt economy, meaning that interest rate hikes cause aggregate expenditure to contract more than cuts would cause it to expand (Sufi (2015)).

From the conclusion:
Monetary policy could have asymmetrical effects in an economy with high levels of household debt, meaning that an interest rate hike would be more contractionary than an equally sized rate cut would be expansionary.

When I was reading the conclusion of the paper, the concept finally hit home:

To get equal upward and downward effects from changes in rates, you need smaller rate hikes and bigger rate cuts. In short, high levels of debt push interest rates down.

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