Differential Effects of Monetary Policy on Household Consumption: The Case of Israel

22/11/2020 |  Ribon Sigal
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Monetary Policy and Inflation
We investigate the distinct effect of monetary policy on households’ consumption in Israel, based on information from the Household Expenditure Surveys for 2003 to 2018. Analyzing aggregate distribution indices, a pseudo panel and the granular household data, and using the local projections methodology proposed by Jorda (2005), we find that (unexpected) changes in monetary policy mainly affect the expenditure on durables. The effect is mostly evident in the higher income quantiles, and to a lesser extent in the lower quantiles. We did not find significant evidence for a monetary policy effect on nondurables consumption. The findings support the existence of an intertemporal substitution effect and a negative wealth effect of the interest rate, and to a lesser extent the interest rate’s effect on the exchange rate which would have increased the consumption of (imported) durables due to the appreciated exchange rate following an interest rate increase. The findings do not support a strong indirect effect of monetary policy on labor income, which is expected to influence aggregate consumption, particularly in lower quantiles with higher marginal propensity to consume.