ESRI Discussion Paper No. 403: Subjective Monetary Policy Shocks and Consumption

This paper proposes a “subjective monetary policy shock” that captures household-specific perceptions of monetary policy and analyzes the effects of monetary policy on consumption at the household level. It constructs a unique panel dataset linking macroeconomic expectations with high-frequency scanner data on consumer spending and estimates the relationship between household-specific shocks and consumption behavior. The analysis focuses on differences in responses according to interest in interest rates, financial exposure, and position in the life cycle.

The results suggest that differences in the degree of interest in interest rates and in interest rate exposure shape the transmission mechanism of monetary policy. The conclusion that household consumption responses to monetary policy shocks are heterogeneous is consistent with Heterogeneous Agent New Keynesian (HANK) models, which emphasize redistribution channels operating through interest rates and prices.

A Taylor rule was estimated based on the macroeconomic expectations formed by households, and the regression residuals were identified as subjective monetary policy shocks. Local linear projections were then used to estimate the impulse responses of consumption to the shocks over time. As a result, statistically significant changes in consumption were limited to households showing high interest in interest rate trends. In response to monetary tightening shocks, indebted younger households reduced consumption, while older households holding assets increased theirs. The paper is organized into an introduction, theoretical motivation, data, identification strategy, empirical results, and conclusion; the empirical results cover average effects, interest and financial exposure, position in the life cycle, and robustness checks.