The Consumer Credit Channel of Monetary Policy
Using the Consumer Expenditure Survey, I document a new fact that the consumption response to monetary policy shocks is greater for households with higher default risk. I propose a consumer credit channel that accommodative monetary policy extends credit disproportionately to risky households which have higher propensities to spend out of extended credit. I study the mechanism in a Heterogeneous Agent New Keynesian model augmented with asymmetric information. In the model, credit limits arise because borrowers can default on loans and borrowing signals a risky type. Accommodative monetary policy extends credit as it lowers default rate and changes lenders's beliefs on the types of borrowers. Calibrated to match the cross-sectional distribution of default rate, credit limit, and marginal propensity to spend, the consumer credit channel accounts for 63% of the heterogeneous consumption responses and 20% of the aggregate response. The model is used to assess the distributional effects of monetary policy and the "risk-taking" channel.