Money Growth and Supply Shock Effects on Consumer Leverage, Consumption and Financial Wealth Available to Purchase

In an intertemporal decision framework, borrowing and wealth holding decisions will incorporate information relevant to future income realizations. One channel for monetary and real disturbances to influence real activity is through revised anticipations of future income. In this study, evidence was uncovered for contemporaneous nominal shock effects on changes in household leverage with nominal and real shock effects uncovered for the growth of nondurables and services consumption and real financial wealth holdings. Evidence was found for potential opportunities to use short‐run monetary policy to offset the impact of sectoral production shocks on the growth rate or the volatility of the growth rate in consumption. The monetary shock would have to be opposite in sign to the sectoral production shock. A similar feature was found for the financial asset holdings. Evidence was uncovered for volatility and growth rate trade‐offs.