Effects of High Household Debt on the Monetary Policy Transmission Mechanism: Some Evidence from Thailand

Abstract

Household debt in Thailand has risen sharply in the past few years. In addition to its downsides on household consumption, the high level of household debt can affect the effectiveness of monetary policy. In this paper, I use the Threshold-Structural Vector Autoregression technique to show that Thailand’s monetary transmission mechanism is weaker during the high-debt periods compared to the low-debt periods. The explanation can be drawn from three arguments which are debt overhang, borrowing constraints faced by households, and the high proportion of fixed-interest rate loans.