Do Households React to Monetary Policy?

We study how households understand and respond to monetary policy by exploiting the open auctions of early-stage crowdfunding and inferring individuals’ expectations based on their maximum requested interest rates. Using loan listings from Prosper, we find that borrowers adjust their willingness-to-pay interest rates in response to unexpected Federal funds rate changes, whereas anticipated shifts have negligible effects. These responses are more pronounced among high-income, high-credit-score borrowers; large loan applicants; and when Federal Reserve communication is transparent. The responses are highly asymmetric—Borrowers sharply lower rates during unexpected easing but resist increasing them during unexpected tightening. The results are robust to alternative specifications, including regression-discontinuity-in-time designs and alternative measures of monetary policy shock. Lenders also respond to policy shocks and counteract borrowers’ adjustments. Analysis of Robinhood data shows that retail investors mirror this behavior by reducing equity holdings after surprise rate hikes.

This paper was accepted by Kay Giesecke, finance.

Funding: This work was supported by the general research fund from the Research Grant Council of Hong Kong [Grant 17504925], the Dean’s Research Fund of the Faculty of Liberal Arts and Social Sciences, The Education University of Hong Kong [Grant FLASS/DRF 04635], the Faculty Research Grants of Macau University of Science and Technology [Grant FRG-24-019-MSB], the Seed Funding Grant of EdUHK [Grant 02C11], and the Block Grant Blueprint of EdUHK [Grant 02A23].

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.04649.