Ida Wolden Bache: The cash-flow channel of monetary policy – micro evidence and macro outcomes

Remarks by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at "Reassessing the Effectiveness and Transmission of Monetary Policy", an economic symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 24 August 2024.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Charts accompanying the speech

Introduction

Good morning. I want to start by thanking the Federal Reserve Bank of Kansas City for the invitation and for giving me the opportunity to be part of this year's policymaker panel. It's a pleasure to be here.

The tightening of monetary policy by central banks over the past few years has been unprecedented in several respects. Chart 1 shows the policy rates for a selection of developed economies. By some measures, the current tightening has been the most globally synchronized of all tightening episodes in the past half century.

And still – the macroeconomic effects of this tightening may vary considerably across countries. My remarks today will focus on one particular aspect of the monetary policy transmission mechanism, namely the cash-flow channel from interest rate changes to household consumption.

I want to make three main points. The first one is that the cash-flow channel is quantitatively important, but its strength varies widely both over time and across countries depending on the composition of household balance sheets and on institutional features of mortgage markets. Second, high quality microdata are essential for gaining insight into this part of the transmission mechanism. And third, the strength of the cash-flow channel has implications for the trade-offs we face as monetary policymakers, especially in small, open economies.