The Household cash flow channel of monetary policy

Changes in interest rates can affect household spending by directly affecting households' interest income and payments and, in turn, the amount of cash that households have available to spend. This is typically referred to as the ‘household cash flow channel of monetary policy’. Household-level data provide evidence that the cash flow channel operates both for households that are net borrowers and for those that are net lenders, though the effect on borrowers is estimated to be much stronger than the effect on lenders. Overall, changes in household cash flow appear to be an important channel through which lower interest rates can stimulate greater household spending.