of tightening supply conditions in pockets of the country, but dwelling construction overall is responding to low interest rates much as it always has done. 4. 2 consumption and the behaviour of borrowers and savers what about the effect of low interest rates on household consumption? this can be modelled in a simple way by linking household consumption to disposable income and household wealth. in such a model, lower interest rates affect consumption indirectly by increasing household disposable income and boosting both housing and equity prices. 8 this simple model ( like the dsge model results i discussed ) provides some tentative evidence that consumption growth has been a bit weaker over recent years than suggested by historical experience. much of that history, however, captures the period of adjustment to easier access to credit from the early 1990s to the mid 2000s. at that time, household indebtedness increased substantially and the saving ratio declined to be well below earlier norms ( graph 4 ). 9 so in a way, the more recent experience could be regarded as the more standard response. indeed, the behaviour of late appears more sustainable than that of the previous episode. 10 one aspect of this change in behaviour is evident in households injecting equity into the housing stock over recent years. that is, their net new spending on housing assets has exceeded their borrowing secured over housing. this stands in stark contrast to the period of strong housing market conditions in the first half of the 2000s, which saw households withdrawing housing equity to help finance their consumption ( graph 5 ). 11 as i just mentioned, the experience of recent years is characterised by slightly lower growth of consumption than might have been expected. however, the responsiveness of consumption to disposable incomes and wealth does not appear to have changed, at least in a statistically significant way. there are two possible explanations for this observation. first, the growth of consumption of late could be affected by factors other than the stance of monetary policy. second, it may be that the strength of the various monetary policy transmissions channels affecting consumption has changed, but in ways that are difficult to identify using models of aggregate household behaviour. although it is hard to be definitive, my sense is that both these explanations are likely to be true. estimates of wealth effects tend to differ somewhat based on the exact data and methodology used in their estimation. previous work by bank staff suggests that households consume between 3 and 4 cents out of every extra dollar of housing wealth. for examples, see dvornak n and m

cash - flow channel appears to be an important part of the transmission mechanism in australia. changes in interest rates affect households ’ and businesses ’ cash flows. if they face liquidity or borrowing constraints, an increase in cash flows will typically lead to more spending. 2 for example, a decrease in interest rates lowers interest payments for households with variable - rate mortgages, leaving them with more disposable income to spend. at the same time, cash flows will be lower than otherwise for those with interestearning assets and they may choose to restrict their spending. notwithstanding this latter effect, decreases in interest rates can be expected to increase demand through this channel. this reflects the fact that the household sector in australia is a net borrower, by which i mean that its interest bearing liabilities are greater than its interest - earning assets. 3 moreover, it seems plausible that marginal propensities to spend are generally higher for debtors ( who may face credit constraints ) than for creditors. unconstrained households can adjust their borrowing so as to smooth their consumption in the face of temporary fluctuations in income. in a closed economy context ( with no public sector ), a net debt position of the household sector would imply that the corporate sector is lending to households. in such a world, lower interest rates would benefit households with debt, but at the expense of lower payments to households that own the corporate sector. in this case, the cash - flow channel would depend on differences in marginal propensities to consume across different types of households. bis central bankers ’ speeches that ’ s a rough sketch of the theory of the transmission mechanism. what can we say about it in practice and how might it have changed over time? 3. estimates of the overall effect of monetary policy it is difficult enough to estimate the strength of the monetary policy transmission mechanism in terms of its effect on the economy overall. it is harder still to separately identify the strength of each of the various channels. a key challenge is disentangling the effect of monetary policy from other influences, such as foreign developments or changes in fiscal policy. this requires models that simultaneously account for these and other forces. there are a wide range of model estimates from which to choose, each capturing different aspects of the ways in which the world works in reality. for illustrative purposes, let me mention just one set of recent estimates provided by some of my colleagues using a socalled dynamic stochastic general equilibrium ( dsge ) model. 4 consider the