RDP 2016-12: The Household Cash Flow Channel of Monetary Policy 2. Stylised Facts

This paper attempts to identify the household cash flow channel by focusing on a sample period around the global financial crisis. To set the scene, it is useful to briefly consider how interest rates, cash flows and household spending evolved in Australia through this period.

From the early 2000s until the global financial crisis in 2008–09, the Australian economy was growing at an above-trend pace and interest rates on both mortgages and deposits were rising (top panel of Figure 1). Consistent with this, household interest payments and receipts were rising as a share of household disposable income (middle panel of Figure 1). At the same time, expenditure on durable goods was growing relatively strongly (bottom panel of Figure 1).

With the onset of the crisis, monetary policy was eased and interest rates fell sharply, directly contributing to a decline in interest payments and, to a lesser extent, interest receipts (as a share of income). This should have resulted in higher cash flows for the average borrowing household and lower cash flows for the average lending household. As the crisis hit, the growth of household durable goods expenditure declined noticeably. However, within a couple of years, growth in expenditure on durable goods recovered to some extent and interest rates also began to rise again.

This cyclical variation in interest rates, cash flows and spending will be important in pinning down the household cash flow channel of monetary policy. But for this we need household-level data, which is discussed in the next section.