Mortgage Debt, Hand-to-Mouth Households, and Monetary Policy Transmission*

Policy intervention in debt renegotiation: evidence from the home affordable modification program

Sumit Agarwa, Yongheng Deng, Quanlin Gu, Jia He, Wenlan Qian and Yuan Ren

Review of Finance, 2022, vol. 26, issue 3, 487-520

Abstract: Using a representative sample of credit card holders from a leading Chinese commercial bank, we investigate how consumers respond to an unexpected interest rate decrease that automatically reduces interest expenses for all mortgage borrowers in the country and thereby generates significant positive disposable-income shocks. Our difference-in-differences analysis shows that compared with homeowners without mortgage obligations, mortgage borrowers increased their monthly credit card spending by 8.7% after the 230-bps mortgage rate reduction announced in September 2008. We find a significant spending response both immediately after the announcement and during the post-reset period. The credit card delinquency rate also decreased after the mortgage rate reset. Subsequent to an interest-rate increase episode, mortgage borrowers symmetrically reduced their credit card spending. Hand-to-mouth mortgage borrowers experienced a more pronounced spending increase. The debt-service channel plays an important role in transmitting monetary policy—our estimate implies a marginal propensity to consume 0.40–0.54 through credit card spending.

Keywords: Consumption; Monetary policy; Disposable income shocks; MPC; Mortgage; Housing; Policy; Constraints; Credit access; Wealthy hand-to-mouth; Debt; Deleverage; Credit cards; Household Finance; China (search for similar items in EconPapers)
JEL-codes: D12 D14 E21 E5 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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