Low interest rates and accommodative monetary policy gained traction in the wake of the financial crisis. But new research suggests debt wary borrowers slow the type of housing and economic rebound expected from the low-interest rate environment.

In other words, the reserach suggests low interest rates create an economic recovery only when borrowers are willing and able to take out loans, especially for homes.

While individuals in lower-income ranges are starting to take on more debt, they are in many cases avoiding housing debt, according to Kansas City Federal Reserve Bank researchers Edward Knotek and John Braxton.

The research team says the percentage of people in the lowest two income brackets who added mortgages or home equity lines in recent years is about half of that consumed by the top three income brackets.

Still, lower-income borrowers are taking on debt, it’s just coming from auto loans, credit cards and other types of borrowing.

The two researchers said in a normal market, borrowers grow cautious and borrow less, which causes demand and interest rates to fall. As rates falls, demand picks up as the cost of borrowing declines, forcing a rebound.

But that’s not what’s happening today, the research team said in a paper called, “What Drives Consumer Debt Dynamics?”

Although Knotek and Braxton see a modest recovery in debt consumption, it’s still low and below what’s expected in this type of environment.

“Part of this rebound is coming from consumers who experienced the sharpest declines in borrowing activity, including consumers from lower-income areas,” they added. “Many short-term interest rates have fallen essentially to zero and cannot go lower,” the researchers wrote. “Thus, neither policymakers nor market forces have been able to push rates low enough to offset the shocks buffeting the economy, such as an increase in caution on the part of borrowers that has reduced demand.”

The report suggests household deleveraging would not have negatively impacted accomodative policies if other less indebted households had picked up the slack by borrowing. However, the report says that did not occur, making the recovery slow and somewhat dependent on the individual perspectives of consumers.


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