Financial markets and household consumption

• Published in: Bank of England. Quarterly Bulletin Vol. 48; no. 1; p. 107
• Main Author: Besley, Tim
• Format: Trade Publication Article
• Language: English
• Published: London Bank of England. Economics Division. Bulletin Group 01.01.2008
• Subjects: Besley, Tim; Borrowing; Consumer spending; Consumption; Economic analysis; Economic impact; Expenditures; Households; Inflation; Monetary policy; Prices; Securities markets; United Kingdom > UK
• ISSN: 0005-5166

In this speech,(1) Professor Tim Besley,(2) a member of the Monetary Policy Committee, reports on research on the relationship between consumption growth and access to finance for UK households. Professor Besley argues that improved access to financial markets over the past 20 years has allowed consumers to smooth expenditures associated with purchases of durable goods, such as housing, and has allowed for greater opportunities for borrowing and/or for saving. He presents a specific quantitative measure of the terms on which households have accessed the credit market over 31 years - the Household External Finance (HEF) index. Periods of credit market tightness, as measured by high values of the HEF index, are associated with periods of weak consumption growth. He notes that the HEF index seems to play a role in explaining household consumption alongside other traditional variables, and that these relationships are most prevalent among younger households. He concludes that considerable weight should be placed on conditions in financial markets in understanding the transmission of monetary policy to the real economy. But there is a great deal of uncertainty, and depending on how credit market conditions stabilise, this may have only a temporary effect on consumption growth. [PUBLICATION ABSTRACT]