High Household Debt and the Transmission of Monetary Policy: A Canadian Case Study

Abstract

This thesis investigates whether the transmission of monetary policy in Canada is affected by the level of household indebtedness. The answer to this has remained distinctly unclear in the literature across countries. Further, rising levels of household debt in Canada has created financial stability concerns for many policy makers. Using state dependent local projections, I show no significant non-linearity in the responses of key macroeconomic variables to contractionary monetary policy shocks. My analysis provides insights into the sensitivity of empirical analysis in the literature to detrending methods and shock specifications. I point to potential explanations for these results through the home equity loan channel and the structure of the mortgage market in Canada.