Rates Up, Balances Up: Uneven Transmission of Monetary Policy in Consumer Credit Markets

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• 5/2026 Poster at Boulder Summer Conference on Consumer Financial Decision Making in CO
  

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Abstract:

What happens to consumer borrowing when interest rates rise? Using a representative panel of consumer credit records and individual-level local projections, we show that contractionary monetary policy increases rather than reduces household debt. A 1 s.d. contractionary shock raises total debt by $3,967, or 7%, over three years. On the extensive margin, the number of credit accounts also increases in response to a contractionary shock. The effect is stronger and more persistent for financially constrained consumers. Mechanism evidence is consistent with an indirect channel: tighter policy weakens labor markets and household income, increasing reliance on credit among exposed borrowers. Our findings highlight an important distributional dimension of monetary transmission, as tightening raises indebtedness among vulnerable households.

Intensive margin: IRF of Total Debt Balance

Extensive margin: IRF of Credit Account

Heterogeneous IRF of Total Debt Balance

Citation

Zhou, Yucheng and Kohli, Divij and Chordiya, Viraj and Mohr, Justin, Rates Up, Balances Up: Uneven Monetary Transmission in Consumer Credit Markets (March 31, 2026). Available at SSRN: https://ssrn.com/abstract=6503298 or http://dx.doi.org/10.2139/ssrn.6503298