Abstract:-
How do the idiosyncratic responses of the households influence the transmission of monetary policy into the granular level consumption expenditure in India? This study applies an approach of Local Projection Instrumental Variable (LP-IV) regression to estimate the Dynamic Causal Effects of a 25-bps contractionary monetary policy shock on household-level consumption expenditures. Impulse Responses of a conventional contractionary monetary shock show a persistent but lagged negative effect on household expenditure, following a positive effect on consumption expenditure in the immediate horizons. Rural households show more sensitivity to the positive impulse compared to their urban counterparts. Two layers of middle-income households capture a greater response to the shock across the regions. We also show an empirical decomposition of the direct and indirect effects of the monetary policy shock on household consumption. We argue for a Sticky Debt that makes household consumption expenditure of rural and middle-income groups different from others to corroborate our findings.