Research

Working Papers

Monetary Policy and Unhedged Interest-Rate Exposures (Draft coming soon)

This paper studies the transmission of monetary policy to household consumption through heterogeneity in household balance sheets. I focus on \textit{Unhedged Interest-Rate Exposures} (UREs), a measure of how sensitive a household’s cash flow is to changes in interest rates based on the timing of rate resets on its assets and liabilities. For instance, a household with a fixed-rate mortgage is largely insulated from a tightening, whereas one with an adjustable-rate mortgage faces higher debt-service costs. By netting the positions that reset within the period, UREs identify which households gain or lose from monetary policy through this cash-flow channel.

Using Danish administrative data, I estimate UREs for the full population and document substantial dispersion and time variation in exposures, as well as an asymmetric joint distribution with liquidity. I then estimate heterogeneous consumption responses to high-frequency-identified monetary policy shocks across the URE distribution. The results reveal a clear, monotonic gradient: households with the most negative exposures cut spending the most after a tightening, while positively exposed households increase spending. The findings suggest that this pattern is associated primarily with stronger saving responses that are consistent with higher debt repayment, rather than with differential income responses.

When I sort households by other characteristics such as income, net worth, or liquid assets, I find little systematic variation in consumption responses. Liquidity matters mainly through its interaction with exposure: among households with similar UREs, those with low liquid buffers reduce spending more, and the gradient is substantially attenuated among households with ample buffers. Taken together, the results suggest that the maturity structure of household balance sheets is a central margin of heterogeneity in monetary transmission, and that policymakers should monitor the distribution of UREs when assessing the effects of interest-rate changes.

Presented at: PhD Workshop on Heterogeneous-Agent Macroeconomics, University of Tübingen.