December 2022 issue contents
Deleverage and Defaults in the United Kingdom

Mario Lupoli, University of St. Andrews 


This paper studies the effect of monetary policy on debt deleveraging in the United Kingdom, finding that households' credit quality functions as a transmission channel for monetary policy. I use a VAR model to estimate the effect of monetary policy on household debt deleverage, measuring both the response of the overall debt stock and the number of individual insolvencies. This has implications for monetary policy rules targeting financial stability. I find that a monetary tightening produces defaults. A time-varying causality test confirms that causality goes from house prices to real debt and shows that the bank rate predicts insolvencies when it is high.

JEL Code: E52, E58.