The Impact of Monetary Policy on Household Leverage

Does Financial Literacy Matter

Bibliographic Data

ID16913166
AuthorsXuezhao Chen (0009-0003-9083-2854, Xi'an Jiaotong University), Chenyi Kang (0000-0001-8702-7107, Xi'an Jiaotong University), Haochang Yang (Xi'an Jiaotong University), Zhenya Zhang (0000-0001-5018-4969, Xi'an Jiaotong University), Kang (0000-0002-8264-5093, Technical University of Munich, corresponding author)
Year2025
Volume15
Issue2
Publication date2025-04-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueSAGE Open (JOURNAL)
Journal identifiersISSN: 2158-2440 • E-ISSN: 2158-2440
PublisherSAGE Publications (PUBLISHER • US)
DOI10.1177/21582440251337275
OpenAlexW4411505937
LanguageEN
References cited39

The rapid increase in household leverage in China has led to potential financial risks and threatened socio-economic stability. In mitigating household debt risks, the effectiveness of monetary policy regulation varies significantly with differences in household financial literacy. Based on micro-level household financial data from China, this paper delves into the impact of monetary policy on household leverage and its underlying mechanisms and analyzes the role of financial literacy in the transmission of monetary policy. The findings reveal that expansionary monetary policy helps reduce household leverage, while contractionary monetary policy leads to an increase. Monetary policy affects household leverage through the “income effect,”“wealth effect” and “substitution effect.” Notably, low financial literacy amplifies the impact of contractionary monetary policy on leverage, whereas high financial literacy mitigates this effect. This paper suggests strengthening financial regulation and risk warning systems, optimizing the design of monetary policy transmission, promoting multi-tiered financial product supply, and deepening the promotion of financial literacy education to achieve an effective balance between “stable growth” and “risk prevention.”

Credit channel · Dynamic stochastic general equilibrium · Economics · Financial accelerator · Financial literacy · Inflation targeting · Monetary economics · Monetary policy · Financial Literacy, Pension, Retirement Analysis · Housing Market and Economics · Microfinance and Financial Inclusion · Finance

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Open DOIOpen Access